Is the US Just Talking Itself Into a Recession?

Talk may be cheap, but the endless chatter about a looming recession may wind up being very costly to the US economy.

As Wall Street and Washington fret over what measures are needed to combat an economic downturn, there’s another debate brewing about whether the nation is talking itself into a recession when one neither exists at the moment nor is a foregone conclusion in the future.

AP

"We're over-reacting to the recession word," Dow Chemical Chairman and CEO Andrew Liveris told CNBC. "Lots of people get together and talk to each other and people believe the psychology."

Adds Liveris: "I noticed there’s a few CEOS who feel the way I do."

And a few economists and money managers, as well.

"It feeds on itself," says Jim Awad, chairman of JW Stewart Asset Management. "You can’t go home every night and hear this and then go out and hire someone or buy a car."

The current recession-mongering--as some might call it-- has picked up in the past two weeks.

Among the recent events: a recurring sell-off in global stock markets, the rush in Washington to draft and pass a fiscal stimulus package, the Federal Reserve’s surprise decision to slash interest rates and the media’s obsession with the slumping economy at the World Economic Forum’s annual meeting in Davos, Switzerland.

Recession, in fact, was on the official agenda at Davos this week, giving the media a captive audience-- or it is prey-- to discuss the subject.

"The economy is still sorting itself through," Liveris told CNBC -- at Davos no less. "I wouldn’t do the 'Chicken Little' thing."

It may already be too late -- for Wonder Dog or Fed Chairman Ben Bernanke, for that matter.

Two big Wall Street firms began predicting a recession three weeks ago when government data showed the unemployment rate jumped to 5 percent in December. That rang recession alarms because the increase put the rate more than five-tenths above its low of the current economic cycle, which has traditionally served as the dividing line between growth and contraction. The Fed typically pays close attention to that recession barometer.

Subsequent government data has challenged – if not refuted -- that argument. Initial jobless claims this past week, for instance, showed that job losses were far below recession levels.

"If the job market remains as vibrant as the most recent data indicate, fears of recession will recede quickly, " said Nomura International chief economist David Resler, who has yet to be convinced a recession is underway or imminent.

"If the job market remains as vibrant as the most recent data indicate, fears of recession will recede quickly, " said Nomura International chief economist David Resler, who has yet to be convinced a recession is underway or imminent.

Either is Bank of Tokyo-Mitsubishi UFJ economist Christopher Rupkey, who muses, "Merely the Fed saying ‘downside risks’ is almost a self-fulfilling prophecy."

Or at least food for thought. Take the case of Caterpillar, which announced record profit for 2007 on Friday. Though the company stopped short of forecasting a recession in the press release accompanying its financial statement, Caterpillar at various points implied or speculated on the occurrence.

Caterpillar also referred to recent statements by the Fed. "The Fed recently indicated that a weakening economy is more of a threat than inflation and that it prepared to move aggressively on interest rates," the release stated.

The company also said; "We forecast the economy will grow 1 percent in 2008, slow enough that the National Bureau of Economic Research may eventually decide that a recession occurred."

Don’t look for any helpful guidance on the current situation there. The National Bureau of Economic Research, considered the official arbiter of when recessions begin and end, has been known to determine the actual beginning of a recession at a time when history laters show that the recession was ending or in fact over.

In the case of the last recession in 2001, the organization declared in November of that year that the recession began in March. It would later turn out that the recession ended in November.

The difference this time around may be Wall Street’s closeness to the economy’s problems. In addition to what appears to be a traditional cyclical slowdown, where both consumer and industrial demand slow, current conditions have a lot to do with the so-called credit crunch, which is something of the evil twin of the housing contraction.

There’s reason to believe that if Wall Street is feeling the pain, you will hear its cries  --

about the specter of recession or the urgent need for interest rate cuts

"I think it right to say a lot of the current anxiety and uncertainty is coming from Wall Street rather Main Street and it is not always that way," observes William Silber, an economic historian and professor at NYU’s Stern School of Business.

Silber, however, says he’s "not aware of any evidence" that recession talk begets a recession, but he also isn’t convinced about the likelihood of a textbook recession on the horizon.

"What the Fed says certainly influences people’s behavior but what the Fed does influences people even more," says Silber.

Wall Street’s pain – or its dread of recession – has yet to be matched on Main Street, unless you live in a city with a high rates of foreclosures.

We're probably a few months away from consumers being afraid of a recession," says Rupkey. "People don't really feel it until job losses hit a certain level and some of your neighbors lose their jobs." He notes the jobless rate peaked at 6.3 percent in the last recession.

Rupkey, Silber and more than a few other economists aren’t convinced that the Fed’s policy responses are the right medicine.

A credit crunch and the popping of an asset bubble are not necessarily corrected through liquidity, economists say. If things (house prices, securitized debt, mortgages) are over-valued lower interest rates may not be able to fix that quickly enough.

Peter Thiel, cofounder of PayPal and president of Clarium Capital Management told CNBC: "All the actions suggest an approach which got us into the mess in the first place. It’s a sign policy makers at this point are actually scared for the first time. There's a sense something is broken down and I think they still don't understand the scale of the problem."

Calling it a recession – never mind declaring one prematurely – is probably another symptom of that.

© 2009 CNBC.com