Risk Of Recession, Or Something Close To It, Remains

ByJohn S. McClenahen Although by the U.S. Commerce Dept.'s preliminary estimate, first-quarter 2001 GDP growth was unexpectedly strong -- at 2%, double the 1% recorded in 2000's final three months -- the U.S. economy remains weak. And whether the U.S. economy heads into recovery or turns toward recession during the next six months probably will be determined by how much businesses and consumers buy. Business spending on equipment and software continued to decline during the first three months of this year -- although not quite as fast as it fell in 2000's final calendar quarter. Capital spending fell at a 2.1% annual rate between January and March this year, compared with a 3.3% rate of decline between October and December of last year. However, as recently as 2000's second quarter, capital outlays were growing at an impressive 17.9% annual rate. "Capital spending won't begin to revive until companies have some sense that profits are picking up," says Bruce Steinberg, chief economist at Merrill Lynch & Co., New York. He doesn't expect that to occur until the final quarter of this year "at the soonest." Meanwhile, consumers continue to shop, with their purchases of goods and services rising 3.1% during this year's first three months. However, "because the labor market continues to deteriorate," Steinberg expects only 2% advances in consumer spending during the current calendar quarter and in the third quarter of this year. And "if layoffs mount and payrolls begin to contract sharply, consumer spending will weaken further," he warns. "At that point the economy would be in recession." Indeed, layoffs promise to outpace job creation for at least the next several months. Economist Maury Harris at UBS Warburg in New York expects this Friday's release of unemployment figures for April to show the overall U.S. jobless rate continuing to rise, up 0.1% from March's mark to 4.4%.