A funny thing happened to the economy on its way to recession: It's taken a detour.
That, at least, is the view of a growing number of economists - including some who not long ago were saying a recession was all but inevitable. They notethat stock and credit markets have steadily improved since the Federal Reserve intervened to keep Bear Stearns Cos. from bankruptcy in early March, and a series of economic reports have been stronger than expected.
Economists also cite swift policy responses, including a sharp reduction in interest rates by the Fed - to 2 percent from 5.25 percent last September- and the distribution of fiscalstimulus checks to millions of Americans, as factors possibly easing the downturn.
"A couple months ago, it seemed like we were on the abyss," said Jay Bryson, global economist with Wachovia Corp., referring to the seizing up of credit markets and the collapse of Bear Stearns. "Things have changed. ... The numbers we'veseen recently haven't been as bad as we were led to believe just a few months ago."
Wachovia now puts the odds of recession at 45 percent, down from 90 percent in April, and expects growth in gross domestic product of 0.6 percent at an annual rate in the first and second quarters of this year, followed by 1.2 percent growth in the third and fourth quarters. While hedoesn't expect a recession, he said growth will be very weak through next year.
Indeed, plenty of economic warning signs remain, as reflected in plunging consumer-confidence data and polls reflecting deep unease among voters. Rising prices for food and other commodities are prompting Americans to trim some spending and stoking concerns aboutinflation. The ongoing run-up in oil prices has pushed the national average price of a gallon of regular gasoline above $3.77 last week, according to AAA, the automobile group. Home prices continue to decline, and many economists expect that to depress spending in the months ahead.
Federal Reserve ChairmanBen Bernanke last week noted that market conditions have improved in recent months since the Fed's actions but cautioned that they "are still far from normal."
Still, Bryson and other economists note that though two main pillars of the economy - the labor market and consumer spending - have faltered, they have not collapsed as they did in past recessions. The Commerce Department said last week that retail sales fell a slim 0.2 percent in April from the previous month - a decline due mostly to a steep drop in auto sales. Excluding autos, retail sales climbed 0.5 percent.
More positive news came when the Labor Department reported that consumer prices edged up 0.2 percent last month, slightly lower than expected.
Job losses, meanwhile, have been less severe than they usually are in recessions. And many economists think the government's earliest estimate of firstquarter GDP growth - 0.6 percent - will be revised upward. After reviewing the retail-sales data, economists at Global Insight, a Waltham, Mass.-based forecasting firm, predicted the government would increase its assessment of GDP growth in the first quarter to 1 percent at an annual rate. They forecast continued growth in consumer spending, partly because of tax rebates and stimulus checks.
In February, Global Insight joined Goldman Sachs, Morgan Stanley, UBS and Merrill Lynch in declaring the nation to be in recession. But Global Insight's Brian Bethune now says that while the firm is still forecasting a recession, "it's conceivable we could avoid it" thanks to "the massive policy response we've seen" since he and others began warning about the risks facing the U.S. economy.
Bruce Kasman, chief economist at J.P. Morgan, said that while earlier this year it seemed like momentum was carrying the economy into a clear recession, there's only "a slightly better than even chance" of a recession now.
"Even though there are meaningful drags from the credit crisis and energy costs, the economy is showing resiliency," he said.
The question remains open, since recessions typically aren't officially diagnosed until some time after pain hits consumers. A common definition of a recession is at least two consecutive quarters of negative GDP. But the National Bureau of Economic Research - the nonprofit groupthat is the official arbiter of when recessions begin and end - defines a recession as a period of significant decline in economic activity across GDP, income, employment and retail sales that lasts more than a few months.
John Lonski, Moody's chief economist, said recent labor market data and signs the credit crunch is easing on Wall Street have made him less gloomy than he was a few months ago. In The Wall Street Journal's latest survey of economists, conducted in May, he said the likelihood of a recession was 60 percent - down from the 90 percent he predicted in the April survey.
"Recent evidence suggests there's a chance the economy might stabilize before this summer," he said. On average, the 55 economists in the survey, conducted earlier this month, said the likelihood of a recession was 62.7 percent, down from 70 percent.
Claims for unemployment benefits - which typically rise well above 400,000 a week during recessions - have stayed well below that level, although they did rise to 371,000 last week after falling in early May. But the economy isn't shedding hundreds of thousands of jobs a month, as it usually does in an economic contraction. In April, employers cut just 20,000 jobs, and the unemployment rate fell.
Even Alan Greenspan, who in early April said the United States was in the "throes of recession" and is going through the "most wrenching" crisis since World War II, has more recently toned down the warnings, saying the country is in an "awfully pale recession." George Soros, who has long argued the nation is headed for a major crisis, also recently remarked that the "acute phase" of the crisis has now passed.
To be sure, even economists who are becoming more upbeat say the nation may be in for a period of protracted sluggish growth.
"I think the problems are just starting," said Lehman Brothers economist Drew Matus, citing high gasoline prices and tightening lending standards, adding that prolonged stagnation can be worse than a recession.
Asked whether the United States could avoid a recession, Gary Stern, president of the Federal Reserve Bank of Minneapolis, said, "No," adding, "But there are recessions and then there recessions. ... The average resident doesn't distinguish between whether the economy is growing half a percent or one and a half percent. ... It's more, how does this feel?" Information for this article was provided by Greg Ip of The Wall Street Journal.
Business, Pages 82, 84 on 05/18/2008