Maybe there isn't going to be a recession after all. That's what Financial Advisor heard when, in late March, it convened a conference call with three leading financial economists to discuss the rapidly changing state of the U.S. economy. They also agreed President Bush's supposedly controversial tax cut was puny. The trio consisted of Paul McCulley, managing director and senior Federal Reserve watcher at Pimco Funds in Newport Beach, Calif.; Brian Horrigan, chief economist at Loomis Sayles & Co. in Boston; and Josh Feinman, chief economist at Deutche Asset Management in New York. They were interviewed by Financial Advisor Editor-in-Chief Evan Simonoff.

Simonoff: Let's start out by asking each of you if you saw the article that Martin Zweig wrote in Barron's (March 26 issue) last weekend? He pointed to 13 indicators, all of which have occurred consistently with a recession in the past. At the same time, there are other key sectors, like autos and housing seem to be holding up pretty well. Do you think we're in a recession?

McCulley: I found Marty's piece to be interesting because I thought it was a very good benchmark for what recessions were like in the Old Economy. I think we're in a New Economy. So while I think it's useful to use Old-Economy benchmarks, I don't think we should take them too terribly literally.

I don't know if we're in the first recession of the New Economy or not. I've actually started describing the economic condition that we have not as a recession, but as post-bubble disorder. That's my new label for what we're experiencing right now, and it doesn't feel good, and it has all of the hallmarks of the old recession.

But there are also a great deal of differences in this post-bubble disorder versus the garden-variety recession of the Old Economy. The essential differences are that we had a bubble-driven economy going into this downturn, and the bubble was not inflationary, but actually deflationary because it led to an explosion in business investment. The increase in supply associated with the bubble in investment is now unleashing inflationary pressures in the context of a slowdown in aggregate demand. That is the hallmark of a recession, and it is actually being driven this time, not so much by inflationary pressures, but deflationary pressures in asset prices as a consequence of blowing up the bubble in equities.

Simonoff: Brian, do you think we're going to have a recession? Are we in one already?

Horrigan: My call is no, we're not in nor going into a true recession. For the purpose of discussion, let us use an approximate definition as two consecutive quarters in GDP decline. Every recession of the post-World War II period has had two consecutive quarters of declining GDP with one exception, in 1960, where you had two quarters of decline interrupted by one very weak positive quarter.

I'm forecasting a period of very slow growth. We had about 1% in the fourth quarter of last year. I think we'll have 0.5% to 1% in first quarter, maybe about 1% in the second quarter and probably a very weak third quarter and then getting stronger. So we could go through this whole episode, if we're lucky, without a single quarter of decline.

Nevertheless, I would call it a growth recession, which would mean a prolonged period of growth well below potential. In some sense, it's like the old Japan, not the new Japan where, back in the '50s and '60s, Japan would have recessions without a single quarter of declining GDP. Just because their potential growth was so strong, they called the recession just a period of low growth.

Feinman: The most likely outcome is that the economy skirts traditional contraction-or a sustained contraction that we would typically call a recession. But it is in the midst of a period of subpar growth, which gradually unwinds some of the tightness in the labor market. That process will play out, at least for a couple more quarters, before the economy starts to gather some momentum, maybe late this year and next year, as the inventory correction subsides, as the effects of easier monetary and fiscal policy hit and so forth.

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