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Thu, Feb 08, 2001 EST
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Recession Already Here
By Jeanne Burke   N.Y. Post
One of Wall Street's most respected economic teams lowered the boom yesterday.

Morgan Stanley Dean Witter's chief economist Stephen Roach and U.S. economist Richard Berner notified clients in their morning report yesterday that the U.S. has officially entered a recession.

The Morgan Stanley economists said that U.S. gross domestic product will contract at an annualized rate of around 1.25 percent in the first half of 2001 - and two quarters of a slowing economy means a recession.

The pair also said the economy will grow by only 1.1 percent for all of this year, a downward revision to their previous forecast of 2.5 percent growth.

At most other Wall Street firms, economists are still forecasting "sluggish growth," but Morgan's defection - less than a week after the Federal Reserve's 50 basis point rate cut - shows that the recession camp is clearly growing.

"For the past several months, we've pointed to the downside risks to the U.S. economy stemming from a number of different factors," Berner told The Post. Those risks have accumulated and recently pushed the economy over the edge and into recession, he added.

Three factors in particular led the firm to change its view now, Berner said: the cold weather that has spurred a rise in natural gas prices to record highs; the power crisis in California, and the negative flow of economic data and information over the last several weeks.

Sinking stock prices and a "mini credit crunch" have also undermined household and business spending, Berner wrote in his report.

The recession will affect demand for big-ticket items and auto sales will plummet 14 percent, he said.

At the same time, Chief Economist Stephen Roach's report to global clients predicted that the U.S. recession would dampen global growth as well. "There is a 45 percent chance that deterioration in the world's largest economy will lead to a global recession in 2001," the report stated.

Last week's cut in interest rates by the Federal Reserve will have a positive impact on the U.S. economy, but it came too late, Berner said. "Most of that impact will come in the second half," he explained. The Bush administration's plan for a big tax cut will also help the economy, but the impact of that won't be felt until "sometime next year."

Although Morgan Stanley is not alone in its bearish outlook, recession is still not the consensus view. "I wouldn't be surprised if lower borrowing costs provide the U.S. economy with enough of a lift to avoid two consecutive quarters of GDP contraction," said John Lonski, chief economist at Moody's Investors Service.

And unlike the recession of the early 1990s, when inflation was a concern, the Fed has "a lot more room for interest rate cuts today," he added. Lonski is sticking by his forecast of 1.5 percent growth in the first quarter and 2.7 percent in the second quarter.

Other economists also put more faith in the psychological impact of a tax cut. "It's very important how both the interest rate and the tax story play out early in 2001," says John Ryding, senior economist at Bear Stearns. "That argues for front-loading the tax package," he added.

Ryding still predicts "sluggish growth" of around 2 percent for the first half of this year, although he noted that the sharp drop in economic activity in late 1999 is very hard to read.

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