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Economy on edge of recession cliff

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The past eight days have seen publication of disappointing, recession-like data, proving beyond a doubt that the U.S. economy has slowed sharply in recent weeks. Several unusual factors clearly have exacerbated the weakness in growth, but the nation is in severe danger of falling back into outright recession unless the tense global standoff over Iraq is resolved soon, analysts say.

With many companies again hemorrhaging jobs, the stock market near its bear-market lows and consumer confidence at its lowest level in more than a decade, many Americans probably feel like the recession of 2001 never ended. And indeed the economic panel that determines U.S. business cycles that it is still too early to declare an ending date to the recession that technically began in March 2001.

By most measures, the economy resumed expanding in January 2002, but now it appears to be contracting again, said Mark Zandi, chief economist for, a forecasting firm. Because of strong growth in December and January the U.S. is likely to post positive GDP growth for the first quarter, he said. But the uncertainty over war in Iraq is taking a heavy toll.

“A precondition for any improvement is a resolution of the Iraqi conflict,” he said. “If it is not resolved in the next month or two we’ll be back in recession. We’re at the edge now.”

Outcome of Fed meeting unclear
Federal Reserve policy-makers hold their second formal meeting of the year Tuesday, with events moving so quickly that some analysts said the outcome of the session is up in the air. Most traders and economists said they expect the Fed to shift its so-called “bias” to recognize the growing economic risk while leaving short-term interest rates unchanged for now. But there is growing consensus that the central bank will have to give the economy another boost as early as next month by cutting short-term interest rates another half-percentage point or more from their current historically low levels.

“We feel the economy is certainly weak enough to warrant another round (of rate cuts),” said David Rosenberg chief economist at Merrill Lynch, who is in the minority camp of analysts predicting a rate cut Tuesday. He noted that eight of the past 11 major economic indicators have come in below consensus, “and it’s not as if the consensus was exactly ebullient.”

“It’s a dangerously close call right now,” he said.

Dismal data
In February, both retail sales and employment fell sharply, posting their worst results since just after the 9/11 terrorist attacks. Consumer confidence, meanwhile, is at its lowest level in a decade according to both major monthly surveys.

One of the few bright spots in the latest batch of economic data was Friday’s report that industrial production edged up in February, driven in part by higher domestic output of gas and oil.

Severe winter weather, high energy prices, the dismal stock market and war anxiety all have contributed to the generally weak results for February and early March.

“Perhaps it’s surprising the economy was even able to show any increase in industrial production,” said Lynn Reaser, chief economist at Banc of America Capital Management. She said continued uncertainty and sustained high energy prices would likely cause the economy to weaken further and force the Fed to act.

“Consumers are growing very cautious, business are cutting again and the global economy is weakening,” said Zandi. “I don’t think February is as bad as the top line numbers suggest, but it was a bad month.”

More black clouds beyond Iraq
Rosenberg said a quick resolution to the Iraqi crisis would help the economy, but he cautioned that a war is unlikely to be an economic cure-all.

“Once Iraq is out of the way, the previous trend will reassert itself, but unfortunately that previous trend was an economy that was bounding along the bottom and an equity market that was still struggling,” he said.

A quick military success for the United States and its allies certainly would spark a sharp rally in equity markets, he said. Mere rumors about supposed plans by Iraqi military leaders to surrender even before the first shot is fired were enough to propel the stock market to its biggest one-day gain of the year, an event Rosenberg called a “good old-fashioned short-covering rally.”

But Rosenberg said that even after the “perfect” Gulf war in 1991, the economy did not begin expanding significantly for more than two years.

“I think we still have to work through the excesses of the late 1990s,” he said.

Some rays of hope
Other economists are more optimistic. Noting that the manufacturing segment has managed to continue growing, albeit slowly, and that business inventories remain relatively tight.

“In a very quick, decisive war scenario without significant negative ramifications afterwards then I do see the economy picking up steam pretty quickly,” said Sung Won Sohn, chief economist for Wells Fargo. “There is a lot of pent-up demand, especially in business spending, and stocks are poised to go higher.”

But Sohn said assuming there is going to be a war, the sooner it starts, the better for the battered global economy.

“I don’t know how long we can maintain this degree of uncertainty,” he said. “We could get into a whole lot of trouble.”