By Daniel Sternoff
NEW YORK, June 29 - The U.S. economy likely ground to a near halt in the quarter ending this week, closing out its bleakest half year since the 1990-91 recession but has probably weathered its worst days and will rebound by year's end, a poll showed on Friday.
Twenty-six top Wall Street forecasters surveyed by predicted, on average, U.S. gross domestic product (GDP) grew at a feeble 0.4 percent annual pace in the April-June period, down from a 1.2 percent rate in the first quarter of 2001.
But a potent brew of 2.75 percentage points worth of Federal Reserve interest rate cuts, front-loaded tax cuts, and the end of a severe drawdown in bloated inventories should lift GDP to 1.6 and 2.6 percent rates in the third and fourth quarters, respectively, the poll found.
"There is some reason to believe that we've seen the worst of it," said David Jones, chief economist at Aubrey Lanston and Co. Inc. "We will skirt recession, but just barely."
The government does not release its first estimate of April-June growth until late July.
Cutbacks in business investment by firms facing a sharp profits squeeze, falling net exports, and a softer pace of consumer spending should all make the second quarter the weakest point of the current slowdown, economists said.
"The most dramatic factor is capital spending. We think it fell sharply. But consumer spending growth fell as well. Because it is the lion's share of the economy, it matters when the consumer twitches," said Jim Glassman, senior economist at J.P Morgan Chase.
Even if the second quarter turns out to be the economy's low point, Jones said it would take time for corporate America to fully recover from the bursting of a late-1990s bubble in technology and capital investment.
The poll found forecasters expected the economy to expand at a 2.9 percent annual rate in 2002, well below the 4.0 percent rate which many economists believe the economy can grow without fueling inflation.
JOBS OUTLOOK KEY
The prime risk to forecasts for a gradual recovery is the threat that rising unemployment will cause consumers, who have been merrily snapping up homes and cars despite the economy's well-flagged troubles, to retrench.
"The corporate sector has just been through the worst profit margin squeeze since the early 1980s. Our view is they are going to have to adopt some of the cost-cutting philosophy we saw in the early 1990s," said Ian Morris, chief U.S. economist at HSBC Securities in New York.
"Not as aggressively, but nevertheless, enough to drive the jobless rate up, and up by enough to hurt consumption," Morris said.
HSBC is forecasting the economy's fortunes will sour further, with GDP shrinking by 2.0 percent and 1.0 percent in the third and fourth quarters, respectively.
The official referee of U.S. booms and busts, the National Bureau of Economic Research, said last week it was possible the economy may have recently slipped into a recession and said the employment outlook would largely set the economy's fate.
The government next Friday releases its all-important June employment report. Economists polled by Reuters forecast the economy shed 44,000 non-farm jobs this month, driving the jobless rate up to 4.6 percent from 4.5 percent in May.
The payrolls report will provide a key indication of whether severe job losses by industrial firms are seeping into the vast services sector.
"Layoffs are a drag, but there are favorable balance sheets. Income, for those who stay employed, has risen faster than it used to as a lagged catch-up to productivity growth trends," said Glassman of J.P. Morgan Chase.
The jobs data, along with a Monday survey on the manufacturing sector, are key ingredients to any final read on second quarter GDP.
The National Association of Purchasing Management's key index of manufacturing activity is expected to show the ailing sector -- one fifth of the economy -- shrank for an 11th straight month but is stemming the pace of its declines
. "We are going through a nebulous period where some of the industrial indicators, because they have been so bad, may actually improve a little bit," Morris said.
"But is it the beginning of the end of the bottom, or is it just a pause before we get more bad news?"