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Experts Deeply Split Over Future of U.S. Economy

Outlook: Some say the global financial crisis will inevitably pull it down. Others foresee a mere lull.


WASHINGTON — For months, the climate has seemed ominous: a fierce financial storm overseas, the ballooning trade deficit, stock market turbulence, fears that credit will dry up. Together, they paint a picture of hard times ahead.

But consider a drastically different reality, the one that most Americans continue to experience in their daily lives: Employment bristles at record heights, incomes are rising, inflation remains benign, interest rates are nestled at modest levels.

Which portrait represents the future? Take your pick. The United States has not faced such economic uncertainty for many years--perhaps not since the Arab oil embargo of the early 1970s, perhaps not even since many Americans feared a return to the Great Depression at the end of World War II.

There is not much disagreement over the near term. Most experts now expect the economy to weaken in the next few months as reports of rising unemployment, slower job creation and thriftier consumers eclipse the breezy prosperity of recent years.

Yet the experts have never before confronted a global financial crisis of today's speed and fury. Some argue it will inevitably draw America into the whirlpool; others figure the United States is merely headed for a gentle lull on a pleasant long-term cruise.

"I sincerely doubt that muddling through is in the cards when there's so much trouble in the world," says Edward E. Yardeni, chief economist at Deutsche Bank Securities Inc. in New York, who is among a growing minority of pessimists. "I think we're going to get pulled into it kicking and screaming."

Retorts James F. Smith, an economic forecaster at the University of North Carolina: "Just because financial markets are crazy doesn't mean that real markets are. The U.S. economy is nowhere near a recession, and I can't imagine there will be one for at least another three years."

Predicting how overseas woes will affect the U.S. economy is like forecasting just where a meteor will crash on Earth.

The consensus view of private forecasters is that the economy will avoid an actual recession, broadly defined as six months of declining business activity, and creep forward next year at a sluggish growth rate of 1% to 2%. This view is of some note because forecasters load their computers with a mountain of clues ranging from personal savings rates to light-truck sales to business investment in technology.

But the conventional wisdom may not mean much before a slump, particularly in a time of unique global conditions for which history offers no obvious lessons.

"You'll never get the community of economists forecasting a recession," maintains James F. O'Sullivan, an economist at the J.P. Morgan investment firm in New York. "It just doesn't happen."

O'Sullivan should know. Earlier this month, J.P. Morgan broke from the pack and became the first major firm to predict a recession for next year, albeit a mild one. Notably, it blamed tighter domestic financial conditions for the slump and played down the risk that major, new problems from overseas would be the villain.

"I'm here 13 years--and it's only the second time we've done it," O'Sullivan says of the recession forecast. "It's not something we do lightly."

Ingredients for Hard Times Ahead

Uncertainties abound. Macroeconomic Advisers, a St. Louis firm, declared: "The economic outlook is more uncertain than at any time in the forecasting history of this firm [16 years] or in the collective memory of those with whom we regularly discuss the outlook [which goes way back]."

Which raises the question: Could today's novel and disruptive mix of financial pressures lead to a more severe outcome than most experts foresee, something closer to a replay of the 1930s than a garden-variety slowdown?

In recent days, some signs have turned positive: Markets and currencies have stabilized, especially in Asia. But it is not hard to see how elements of the domestic and global economies could interact in particularly disruptive ways.

Already the U.S. trade deficit is burgeoning as recession-rattled nations overseas slash their purchases of American goods and American consumers vacuum up their cheap exports. This is slamming U.S. manufacturers and putting export-related jobs in jeopardy.

Japan's banking system remains in tatters. Brazil's future is unclear, with many analysts forecasting a recession there that could spread to the rest of the region.

Elsewhere, China's growth is being squeezed and its financial sector is troubled. And Russia, which remains wealthy in natural resources, could be tempted to flood the world with raw materials to get desperately needed money, turbocharging a slide in commodity prices that has already hit farmers and energy producers here and abroad.

Some fear that the economic distress in many parts of the world will spark widespread pressure for protectionist trade policies, an approach that worsened the Great Depression and would surely spark tit-for-tat responses throughout the global trading system.

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