US economists back 2002 recovery

AMERICAN economists are unusually uniform in their belief that the US economy will stage a vigorous recovery in 2002 - but it may not happen fast enough for Wall Street.

Stock and bond markets there are acting as though the recovery will come in the first quarter. The bond market has already priced in an interest rate rise - possibly by March - and the major stock indices have risen anywhere from 20% to 50% off their autumn lows in anticipation of a quick turnaround.

There are only a few US economists who expect a rapid end to the recession that began in March. Even Merrill Lynch's Bruce Steinberg, among the most bullish, said that the recovery will not happen in the early weeks.

'The US economy is going to recover, and recover strongly, but not quite yet and not as soon as the markets seem to expect,' he said. Steinberg expects a contraction of 1% in the first quarter followed by the start of a recovery in the second quarter, with growth rising 3%.

The adjustment to inventories, which gathered pace in the latter half of 2001, could even lead to 5% growth in the second half of the year, he said. 'We liquidated a huge amount of inventory, something like $63bn (£43.4bn) in the third quarter and $75bn in the fourth - just incredible amounts,' Steinberg said. 'That will have a very positive influence on growth next year.'

Steinberg said that inventory rebuilding will be followed by a pick-up in consumer spending and, in the second half of 2002, businesses will return to spending on technology. Non-tech capital expenditure will wake up later in the year.

Merrill Lynch is bullish on America, but others are not so optimistic about capital spending, a critical factor in the sustainability and strength of recovery. Dick Bern, chief economist for Morgan Stanley expects capital spending - a linchpin of America's nine-year expansion that ended so abruptly in 2001 - will not recover substantially until 2003 because there is too much excess capacity.

Hi-tech firms are operating at their lowest operating levels since the mid-1970s. 'We are going to see more cuts in capacity and more companies going out of business because there is still a strong imbalance out there,' Bern said. 'Everyone thinks this is a mild recession but it isn't mild at all in technology and manufacturing. Capital spending will be lucky to turn positive next year.'

Even if corporate spending remains subdued, the US government's ramp-up in outlays will support the expected bounce in the economy. The stimulus package that died in Congress earlier this month would have boosted growth by an additional-0.5% to 1% in the latter part of the year, but current spending - thanks to the war in Afghanistan and a bigger domestic budget - is so much higher than in recent years that the government's contribution to growth will be large, David Wyss, chief economist for Standard & Poor's, said.

Wyss expects 4% growth in the second half of the year, but is worried about long-term prospects. 'What we will do for an encore, I'm not sure,' he said. 'We will still be faced with excess capacity and, by later in the year, interest rates going up. I see a nice spurt for four to six quarters - and then what?'

On interest rates, many economists expect weakness into the first quarter will prompt the Federal Reserve to ease monetary policy one last time bringing the Fed funds rate down to 1.5% from 6.5% at the beginning of the easing cycle that began a year ago.

Unemployment will continue to rise and, until the labour market stabilises, the Fed is unlikely to raise rates, especially as inflation will not be a problem. Downside risks remain large. Another shock to the economy - an escalation of hostilities in the Middle East, a disruption of oil supplies, another terrorist attack - would put an end to US and global recovery prospects. On that at least, there is no disagreement.

Wall St analysts split on markets