Washington, March 23 (Bloomberg) -- The U.S. expansion was about tappedout, data suggested. Home and car sales were falling, debt was rising, and,according to at least one well-known economist, there was a 50-50 chance theeconomy would slip into recession. The year was 1995, and as it turned out, rather than contracting, the U.S. wasjust beginning one of the greatest growth periods in its history. Gross domesticproduct expanded 3.6 percent in 1996, better than 4 percent in each of thenext three years, and 5 percent in 2000. The experience of 1995 shows just how difficult a job it is to forecast theeconomy -- and for Federal Reserve officials to make monetary policy. ``Nobody has a clue,'' Scott McNealy, chief executive officer of SunMicrosystems Inc. said this week. ``Any economist who thinks he knowswhat's going on is wrong.'' On Dec. 8, 1995, the latest numbers were feeding a growing consensus thatthe expansion, which was then five years old, was coming to an end. Thegovernment had just reported that new home sales declined 2.7 percent inOctober 1995, even as mortgage rates fell. Autos sold at a seasonally adjusted annual pace of 15 million in November ofthat year, below the previous year's rate of 15.5 million, and carmakers wereidling plants.
Rising Debt, Inventories
Adding to strains then: rising consumer debt, an inventory backlog, saggingforeign demand, and continued manufacturing weakness -- the NationalAssociation of Purchasing Managers' December factory index was at 46.5. ``Clearly, the risk of a recession is far higher now,'' Ray Stone, managingdirector of Stone & McCarthy Research Associates in Princeton, New Jersey,said that day in 1995. He put the chance of a recession the following year ateven money. And now? ``Well, we didn't have a recession,'' Stone said this week. ``Andthere's reason to be fairly confident there's not going to be a recession now.'' Still, eerie parallels exist between 1995 and today. Sales of new single-familyhomes fell 10.9 percent this January, the largest drop in seven years. Autosales were down in February 2001 from the same month a year ago,contributing to an inventory backup. Borrowing by U.S. consumers surged by$16 billion in January as credit card debt rose at the fastest pace sinceAugust. Manufacturing is sagging today, as it was in 1995. The NAPM index was 41.9in March.
Overseas
Overseas economies are again -- or in the case of Japan, still -- struggling. TheJapanese economy is flirting with recession, and European economies arewobbling. ``We'll have to see how it plays out,'' Stone said. ``We're in a little bit ofuncharted territory now.'' That's primarily because stocks rose in 1995, and continued rising throughearly 2000. This year the Dow Jones Industrial Average is down 13 percent,while the Nasdaq Composite index is down 23 percent, and 62 percent from itspeak of 5049 last March. ``That's one thing that's materially different today than in 1995,'' Stone said.``The turmoil in the stock market beginning last year is one of the factorsweighing against growth.'' And yet, just like in 1995, the economy may be poised to surprise. January2001's annualized rate of 921,000 new home sales was still higher than the907,000 homes sold in 1999, the industry's best year, and mortgage rateshave fallen below 7 percent. ``The national housing market has remained strong, even though the economyhas slowed,'' said Stuart Miller, president of Lennar Corp., the Miami-basedbuilder.
Improving Auto Picture
At the same time, the outlook for automakers is improving. The seasonallyadjusted annualized selling rate for February 2001 was 17.5 million, up from17.2 million in January. General Motors Corp. and Ford Motor Co., the world'stop two automakers, plan to increase production in the second quarter. ``Despite the recent economic slowdown and anticipated sales decline,consumer demand is holding relatively steady,'' said GM Vice President BillLovejoy. If automakers realize their current second-quarter production schedules, thatalone should be enough to keep the economy out of recession, adding 1.5 to 2percentage points to GDP, said Diane Swonk, chief economist at Bank OneCorp. in Chicago. The rise in consumer credit, meanwhile, suggests Americans haven't beendiscouraged by rising energy costs and layoff announcements. ``People don'tborrow unless they are reasonably confident of their jobs and prospects,'' saidWilliam Sullivan, an economist at Morgan Stanley Dean Witter in New York. Fed policy makers had raised their benchmark interest rate to 6 percent at thestart of 1995, and by the end of the year had cut it to 5.5 percent. In early 1996they cut it again, to 5.25 percent. This year started with the target overnight bank lending rate at 6.5 percent. Inthree moves over three months, the central bank has cut that to 5 percent in abid to stave off a recession. Along with stocks, a second big change from 1995 is the acceleration in U.S.worker productivity. At the end of 1995, productivity was growing at a 1.1percent annual rate. At the end of 2000, annual productivity growth was 3.4percent. Whether rising productivity can offset the effect on consumers of the recentstock swoon is the biggest question facing forecasters. Will people stopspending because their portfolios have fallen? Or does spending depend moreon regular, rising paychecks? Unemployment is just 4.2 percent and earningsrose 4.1 percent over the past year. ``Are we going to have a recession? Our view here is not,'' Stone said. ``But wecan't say that with a high degree of confidence.''