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First Step to "Official" Recession
-- October 31, 2001

We think the economy performed even worse than the preliminary GDP numbers show. As these numbers are revised in the coming months, we expect that they will show a much larger contraction in the economy than the numbers released today. And next quarter, it's likely that we'll see an even greater contraction.

President Bush remarked that theGDP's contraction of 0.4% confirmed "that the events of Sept. 11 have really shocked the nation." But that isn't the whole story. The economy was in recession mode even before September 11th. Two bad weeks at the end of one month will not bring down an entire quarter's GDP unless the economy was already performing terribly.

What this report does confirm is that the Administration's tax cut and the Fed's series of rate cuts have not succeeded in stimulating the economy. Even before September 11th, taxpayers had spent only one-third of their tax rebates. And, even with the Fed's post-attack rate cuts, new and existing home sales have fallen and business investment has decreased. More stimulus packages will only grow the federal deficit -- and in this time of war, that's a recipe for disaster.

We think there aren't really any measures the government can take to avoid a recession. In fact, the tactics they use could drag out the economic downturn. Although they may temporarily alleviate some of the economic pain, the economy will be worse off in the long run. The best thing that the government can do is to let this recession run its course, and start rebuilding once the market has purged itself.

Until then, the best thing for investors is to sit back and wait.

related article: U.S. Economy Contracts Slightly