Economy to Claw Back, Even Without Help

The U.S. economy will claw its way out of recession early in 2002 with or without new stimulus measures from Congress, although less vigorously than hoped for and at greater cost in terms of lost jobs, economic analysts say.

A bid by the Bush administration and Congress to craft a package of measures worth $75 billion to $100 billion collapsed in acrimony last week amid a finger-pointing debate whether tax cuts or more spending would be most helpful.

The chances of breathing life into it are seen as remote, with Congress not even scheduled to resume business until Jan. 23.

But there is scant mourning for shelved plans for fiscal stimulus, which could have spurred demand through a range of measures like accelerated depreciation for equipment purchases, rebates for low-income Americans and somewhat lower middle- income tax brackets.

The White House itself tried to put the best face on its inability to reach a deal with lawmakers, with President Bush saying last Friday a package might not even be needed.

After Treasury Secretary Paul O'Neill spent months unsuccessfully trying to persuade lawmakers that added stimulus was vitally needed to get the economy, already weak and further shaken by the Sept. 11 attacks, safely back on track, Bush said there was ample time to weigh the economy's health when Congress resumed in January. O'Neill, the administration's point man on stimulus, said at the beginning of the process that if it failed, it would be his responsibility.

``The stimulus package was all very nebulous anyway, so its failure probably means a constraint on the degree of recovery rather than on its actual timing,'' said economist David Orr of Wachovia Corp. in Charlotte, N.C.


Orr sees a slim possibility for ``piecemeal'' revival of parts of the package -- for face-saving reasons if nothing else -- but said it would have little practical impact in helping the economy out of a recession that began last March.

``It would be too late to help the economy in the first half and during what is, to me, its most vulnerable period, which is the first quarter,'' he said, adding he still expected expansion to resume in the April-June second quarter.

``But the main result ... of lack of stimulus is that, instead of growth at a 3-1/2-to-4 percent rate during the third and fourth quarters, we're going to get 2-1/2 percent to 3 percent,'' Orr said.

Unemployment, currently at 5.7 percent, is widely forecast to keep rising to a peak around 6.5 percent in 2002, or possibly as high as 7 percent without the stimulus package that had been aimed at encouraging businesses to invest and expand.

Most analysts voiced similar views, with some noting the end of stimulus plans could actually yield a benefit in that it might prompt the Federal Reserve to hold interest rates at current 40-year low for longer than expected.

``Economic recovery will be weaker as a result -- knocking 1/2 percentage point from growth in 2002 -- although fiscal policy will still be expansionary due to measures passed earlier,'' Goldman Sachs & Co. economist Ed McKelvey wrote in a recent report.


McKelvey, commenting after negotiations between the White House and Congress collapsed and a separate bill passed by the U.S. House of Representatives went nowhere, said the impasse ''strengthens our conviction that Fed policy will keep short- term interest rates low for an extended period'' as monetary policy takes up the slack for failed fiscal stimulus.

The U.S. central bank cut U.S. interest rates 11 times in 2001, lowering its key federal funds rate dramatically to 1-3/4 percent -- the lowest in four decades -- from 6.5 percent at the beginning of the year.

The key reason analysts remain unshaken about recovery is that other cyclical forces, notably a sharp drawdown in inventories, still are seen as intact and able to provide an economic bounce as 2002 wears on.

``All of the internal dynamics that should bring about a recovery in the first quarter remain in play -- an ongoing inventory adjustment, lower energy prices and I think spending is going to maintain a slow but positive pace,'' said economist Jay Feldman of Credit Suisse First Boston in New York.

``We still think recovery is in train, but you would have to allow that there is a bit of downside risk now,'' Feldman added, since the lift from more spending and investment incentives apparently has vanished.