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US recession may be as deep as in the 1990s

Fed likely to remain aggressive about cutting rates as a result, says Merrill

NEW YORK – THE United States is in a recession that could be much worse than what it faced in 2001, and closer to the sharper economic slump of the 1990s, investment bank Merrill Lynch has said.

The bank also said the US Federal Reserve would likely remain in ‘aggressive rate-cutting mode’ as a result, cutting rates by 50 basis points on March 18.

Merrill argued that the manufacturing slowdown in the US mid-Atlantic region showed a ‘collapse in business confidence’ to levels not seen since the 1990s recession.

‘A pullback in the outlook of this magnitude could be extremely corrosive to the economy because it means shuttering production, slashing inventories, deeper job cuts and even cancelling capital expenditure plans,’ Merrill said in a report on Thursday.

The Philadelphia Federal Reserve’s business activity index, a reading of factories in the mid-Atlantic region that is viewed as a precursor of national factory performance, fell to minus 24 this month, below expectations for a minus 11.

Readings below zero show contraction in the industrial sector.

The reading was worse than even the most pessimistic Wall Street forecast, and suggested that economic deterioration is happening even more rapidly than many expected as the housing downturn continues unabated.

‘The debate is no longer about whether the economy is in a recession. In our view, it is about how hard the landing will be,’ Merrill said.

The six-month outlook in the region has collapsed from a cycle high of 39.6 last October to minus 16.9 this month, the steepest decline ever recorded by the Fed report, the bank noted.

‘This is clearly pointing to an economy that is in a recession,’ said Mr Eric Green, an economist at Countrywide Financial.

The softness was pervasive and looked to be getting worse, with the index of six-month business conditions falling to its lowest level since 1990.

New orders remained in negative territory but improved to minus 10.9 from minus 15.2, although employment did turn positive after a dip last month.

Separately, the Conference Board’s index of leading US economic indicators fell for a fourth straight month in January, dropping 0.1 per cent and corroborating the weakness seen elsewhere in the economy.

‘Four monthly declines in a row ordinarily is taken as an indicator of a manufacturing recession,’ said Mr Pierre Ellis, a senior economist at Decision Economics.

These concerns drove the stock market sharply lower and triggered a rally in the US Treasury bond market.

The Dow Jones Industrial Average fell 142.96 points, or 1.2 per cent, to 12,284.3 at the closing bell on Thursday.

Source: REUTERS (The Straits Times 23 Feb 08)

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