US already in recession, economists say

ECONOMISTS in the latest Wall Street Journal forecasting survey are increasingly certain the US has slid into recession, a view reinforced by new data showing a sharp drop in retail sales last month.

"The evidence is now beyond a reasonable doubt," said Scott Anderson of Wells Fargo.

Thirty-six of 51 respondents, or more than 70 per cent, said in a survey conducted from March 7 to 11 that the economy was in recession.

The Commerce Department said on Thursday that retail sales fell 0.6 per cent in February; sales excluding the volatile auto and auto-parts categories fell 0.2 per cent. The declines reflect a sharp slowdown in consumer spending, which accounts for more than 70 per cent of US economic activity, as Americans grapple with high petrol and food costs and declines in home values and other asset prices.

The survey marked a precipitous shift toward pessimism from the previous survey, conducted five weeks earlier. The economists now expect non-farm payrolls to grow by an average of just 9000 jobs a month for the next 12 months - down from a previously expected 48,500.

Twenty economists expect payrolls to shrink outright. On average, the economists predict the unemployment rate will be 5.5 per cent in December, up from the current 4.8 per cent.

Fuelling the gloom was last Friday's employment report, which showed a loss of 63,000 jobs in February, the second consecutive monthly decline. Twenty-nine of 55 respondents said they expected the economy to contract in the current quarter, and 25 expected it to do so in the second.

The economists, on average, forecast meagre economic growth - just 0.1 per cent at an annual rate in the current quarter, and 0.4 per cent in the second.

Although the classic definition of recession is two consecutive quarters of declines in the gross domestic product, Stephen Stanley of RBS Greenwich Capital points out that the National Bureau of Economic Research - the non-partisan organisation that is the official arbiter of recessions - did not always strictly follow that definition.

"If you go back to the 2001 recession, there was only one negative GDP quarter, and there might not even be one negative quarter in this recession," he said.

Almost half the economists surveyed said a recession this year could be worse than the 2001 and 1990-91 downturns.

Amid the rising concerns, respondents expect more action from politicians.

Some 63 per cent said the use of public money to deal with the housing crisis was now likely or certain, while they expected the Federal Reserve to lower the target for its benchmark federal funds rate to 2 per cent by June from the current 3 per cent.

Fed policy makers meet on Tuesday, and futures markets are fully pricing in at least a 0.5 percentage-point cut in the rate and indicating a 90 per cent probability of a 0.75-point cut.

Officials had, before this week, been unconvinced that a 0.75 per cent cut was needed, given signs that inflation psychology is worsening.

But those views may have been affected by continued upheaval in credit markets, as well as weak retail sales and employment data. Market participants say this would be a risky time to cut rates less than what investors expect. The Fed will have to weigh the urgency of addressing the credit crunch against the risk of appearing unconcerned about inflation.

Most forecasters expect an economic recovery to begin in the second half of this year, as the Government's economic stimulus package and the interest rate cuts begin to spur the economy. By the end of the year, they expect inflation to be running at an uncomfortably high 2.7 per cent, raising the question of when the Fed might start raising rates.

Some 84 per cent of economists in the survey said the Fed was too slow to raise interest rates in 2003 and would want to avoid that mistake.

Still, "it's going to take some time even under the best of circumstances before the Fed can be comfortable that the economic situation has stabilised", said Bruce Kasman of JP Morgan Chase.

February's decline in retail sales, which followed a 0.4 per cent increase in January, raises the likelihood that the overall economy will contract in the first quarter.

Many retailers are bracing for tougher times. Even if the current downturn did not yet meet the technical definition of a recession, "it certainly feels like a recession based on consumer sentiment and confidence reaching record lows", Men's Wearhouse chief executive George Zimmer said earlier this week.

"The average consumer is feeling economic pressure as they experience rising prices in fuel and basic staples, the effects of declining home prices, which for most individuals represent their single largest asset, not to mention the possibility of foreclosure on their home," Mr Zimmer said.

Categories tied to housing took some of the biggest sales hits, but the declines were widespread: sales at department stores dipped 0.2 per cent, while restaurant sales fell 0.4 per cent.

Consumers are pulling back in part because of a weakening job market. Initial claims for unemployment benefits last week were unchanged at 353,000 from the week before, the Labour Department said yesterday.

That suggested employers are slowing their hiring rather than making big lay-offs. Continuing unemployment claims rose 7000 to 2.84 million for their fourth straight gain.

Meanwhile, business inventories increased 0.8 per cent in January, suggesting production slowdowns ahead as the economy slows. Import prices rose 0.2 per cent in February from a month earlier and were up 13.6 per cent from the year before, reflecting the weak dollar and rising commodity prices globally.