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January 22, 2001

Economy Hits Pothole But Won't Stall Out
By Reuters

Downward Spiral Into Recession Has Begun ... Weiss comments

NEW YORK - The giant U.S. economy drove into a pothole this winter and faces six months of bumpy riding before it starts revving back up to cruising speed, according to new Reuters poll of economists.

A jump-start from the Federal Reserve's surprise half percentage point cut in short-term interest rates early this month, with more cuts expected, should get the economy back on track by mid-year, most economists polled said.

But recession worries loom, with economists fretting that plunges in consumer and business sentiment could cause a nasty bump -- even throw the economy into a deep rut.

"Consumer confidence is going to be the driving factor here, whether a steeper inventory correction in autos or in housing sales is required," said Cary Leahey, senior economist at Deutsche Bank in New York.

In the Reuters poll conducted last week, economists on average forecast that growth in 2001 will slow to a 2.3% rate, down from roughly 3.5% expected for last year and off from its robust 4.2% 1999 rate.

January through June will be the toughest months.

The 25 leading North American investment firms and economic analysts polled forecast on average that growth slid to 2.0% annual rate in the fourth quarter of last year. They expected it to slump further in the first quarter to 1.1% growth and then start an anemic recovery to 1.9% in the second quarter.

Salad Days Over

This is a far cry from 5.6% growth seen in the heady summer days of 2000 when businesses saw endless demand ahead.

"The economy was on such fire a few quarters earlier, that production got a bit ahead of itself. Now there are too many cars, too many personal computers. Those have got to be worked off," said Avery Shenfeld, economist at CIBC World Markets in Toronto, who expects a 1.3% contraction this quarter.

Already working off the inventory overload has caused a five-month manufacturing contraction. Companies have shuttered plants and laid off 162,000 factory workers in the past year. Manufacturing accounts for 18% of national output.

Economists expect the economy to return to a respectable 3.6% growth rate in 2002 -- as long as consumers don't panic.

We know that economist's forecasts rarely hit the mark -- this time, they're dead wrong. But they did get one thing right. They warned that a drop in consumer confidence is a big reason why the recession could last longer.

The severe slowdown in the economy was brought on by high energy costs and subtle inflationary pressures, a drop in demand first by overseas buyers, a loss of confidence in stocks, and a smoldering credit crisis that could explode at any minute. All of these factors are still fueling the downward spiral of the economy to some extent. And a precipitous drop in consumer confidence levels is enough to catapult the economy deep into recession.

The latest University of Michigan's index of consumer sentiment dropped to 93.6 for January from 98.4 in December. It's the lowest level since the Asian financial crisis of 1997-98, and the last time consumer confidence levels fell this sharply was when the last recession hit. Consumers will clamp shut their wallets, and companies, not wanting to get stuck with excess inventory, will lay off workers and slow production. This, in turn, makes it impossible for consumers to start buying again and more likely that businesses will slow even further as the economy grinds to a halt. But it's likely that the only time you'll hear the word "recession" from relentlessly optimistic economists is after the crisis is over.

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