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US headed for recession - but don't panic

BT Funds Management's chief economist Chris Caton says investors need to be cautious while the economic situtation in the US becomes clearer.

Monday, February 12th 2001, 10:45PM

by Philip Macalister

The United States economy is headed for a recession, as opposed to a soft landing, and this will have significant impact on other countries, BT Funds Management's chief economist Chris Caton says.

He says that the consensus forecasts for the US's 2001 growth rate have fallen from about 3.7% in September to 2.6%, and the view now emerging is this that a recession is on.

Two other important signs that there is trouble in the US is that consumer spending has slowed significantly, and the US Conference Board Index of Leading Indicators has plummeted.

Countries such as Australia and New Zealand which are closely correlated to the US and do a large portion of their trade with Uncle Sam will be hit. Many of the Asian countries are also likely to take a hit as a large proportion of their exports are electronic goods destined for the US market.

Caton says President Bush's proposed tax cuts won't help the recession as they will come too late.

"Tax cuts won't help the recession, but they will help the recovery," he says.

"The longer the recession the more they will help," he says.

Caton warns people to be cautious when interpreting predictions about economic downturns.

He says there are four stages in forecasting an economic downturn. It starts off with the "let the good times roll" the boom will last forever, then it forecasts move to growth will slow to a soft landing - this time it will be different.

Following that is the current stage there will be a mild recession with recovery six months from now. The economy will move into deep recession with the recovery always being six months away until, all of a sudden, the recovery is under way.

Caton reckons the recession is already under way (and probably started in November) and the risks are still on the downside.

He says each recession since World War II has lasted, on average, 11 months.

Caton's advice to investors is simple; don't panic.

"Until the situation becomes clearer they should be cautious."

He says that once fund managers begin to price in the recovery (and they do that before economists and forecasters) then there will undoubtedly be an equity market rally.

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