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U.S. economy may be headed for another major recession, says new UC Berkeley study
04 October 2002

By Ute Frey, Haas School of Business

Berkeley - The national economy is more likely headed for another serious recession rather than a continued slow recovery, according to a new report from the University of California, Berkeley's Haas School of Business.

Kenneth Rosen, chair of the Fisher Center for Real Estate and Urban Economics at the Haas School, and co-author and research assistant Amanda Bishop, say the current economic environment has several characteristics of previous recessions.

"Although some forecasters anticipate a continued recovery, we believe there is a substantial chance that we may enter a full-blown recession in late 2002 and 2003," they say in their report that calculates those odds at 60 percent.

In "Another Leg Down: Risk Factors that Could Push the Economy Back into a Full Blown Recession," they note the economy may be affected by a number of other risk factors such as a volatile stock market, badly bruised technology and telecom sectors, and corporate accounting scandals and corporate fraud.

Rosen, who holds the California State Chair of Real Estate and Urban Economics at the Haas School, is known in the business community for his annual real estate and economic forecasts.

He and Bishop say they base their findings on current economic trends that cause consumers to reduce their spending. Those include the stock market correction; corporate America's second-round layoffs; high private sector debt; a potential corporate credit crunch; geopolitical events such as fear of terrorism and a potential United States-Iraqi war; a high foreign trade deficit; and a continuing capital spending slump.

Some of these factors, such as high private sector debt and a credit crunch, have been present in previous major recessions.

At the same time, Rosen and Bishop say a few forces are stimulating the economy. The most notable, they say, are the extremely low interest rates that have been spurring a huge demand for homes, home improvements and new car purchases. Other forces helping to buoy the economy and keep it from slipping into a deep recession include a surge in defense spending and year-over-year increased industrial production.

In their January 2001 report, "Recession Risk Rising," Rosen and co-author Amanda Howard accurately forecasted an impending recession, based on an overheated stock market and some of the same trends that Rosen and Bishop say are affecting the economy this fall.

"These factors put the economy at a 60 percent risk of reentering a full-blown recession like ones experienced in the 1970s, 1980s and early 1990s," predicts Rosen. "However, if the consumer keeps spending, it is possible that a slow recovery will continue. The odds of a slow recovery continuing are 40 percent."