- Most forecasters are predicting a healthy recovery from
the mildest recession since World War II, but at least one high-profile
pessimist says the unexpected strength the economy displayed in the first
few months of the year is a classic midrecession spurt that will be followed
by a renewed slump.
"It's a head fake," says Stephen Roach, chief economist for Morgan
Stanley. "The analytical case for a double-dip (recession) is actually
more compelling today than it was at the first of the year."
Most economists find the double-dip idea far-fetched, but Roach got a bit
of support recently from Federal Reserve Chairman Alan Greenspan, who told
Congress that while the odds favor a solid recovery, it's not out of the
question that there could be a "real slip back."
The markets are worried, too. Despite Friday's news that the U.S. economy
roared ahead at a 5.8% rate in the first three months this year, the stock
markets and currency exchanges are anxious about poor corporate profits
and a slowing rebound. The dollar has lost ground against major currencies,
and last week, the major stock indexes posted their worst one-week loss
since September.
Though economic numbers surprised Roach early in the year, that early strength
has given way to signs of weakness. In the past week, housing sales slipped,
durable goods orders retreated, and the University of Michigan's consumer
sentiment measure revealed new consumer anxiety.
The heart of his argument is that many excesses that recessions usually
purge from the economy are still there. "We've come off one of the
biggest bubbles ... that any of us have ever lived through," he says.
How can we "believe that we can go through that period with the shortest
and mildest recession on record and instantly go back to a vigorous recovery?"
Roach is used to seeing the cloud where others see the silver lining ó
he was among the few who warned of a recession when most thought the economy
would avoid one. The official call by the National Bureau for Economic
Research made him right, though many economists now argue the slump was
too mild to qualify. His latest forecast rests on a few main points:
* History. Five of the last six recessions have had a double dip in which
an apparent recovery was followed by at least one more quarter of economic
contraction, Roach says. Typically, businesses begin increasing production
once the worst seems to be over ó exactly what's happening now ó
only to be hit by another shock that sends them reeling again, he says.
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- * Continuing imbalances. Consumers are carrying more
debt than they do at the start of recoveries; companies still have bloated
capacity and high labor costs; and the current account deficit remains
at about 4% of GDP instead of nearly balancing, as it does in most recessions.
"The economy will be facing an uphill struggle for longer than you
think," Roach says.
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- * Consumer pullback. Consumer purchases of big-ticket
"durable goods" surged a stunning 39% in the final three months
last year, mostly because zero-percent financing deals caused a rush to
auto showrooms. Roach says there will be an inevitable payback: "When
you buy a car today, you don't buy one each day, each quarter, year in,
year out." *
Roach admits he could be wrong. "The biggest risk to the double dip
is that the American consumer just keeps plowing ahead," he says.
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