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Recession Unlikely, But Risks Are Rising

When credit market woes hit last month, Wall Street warmed at the prospect of interest rate cuts from the Federal Reserve.

August job losses and continued housing woes make Fed easings a virtual lock, but now people are starting to worry about a recession.

Most analysts say an economic downturn remains unlikely, but clearly the risks have grown.

"We're at the proverbial fork in the road," said Lakshman Achuthan, managing director at the Economic Cycle Research Institute. But, "I don't think there's enough to say right now that, boom, a recession is a done deal."

The ECRI's leading U.S. index has trended lower. The gauge's annualized growth rate has dived to 0.6% on Aug. 31 from 6.9% in mid-June. But Achuthan says that signals a slowdown, not a recession.

A UCLA forecast on Wednesday said the housing slump will push the U.S. to the brink of recession but that growth in other areas should lead to a recovery by 2009.

On Thursday, a Reuters poll of 114 analysts said the median forecast was for growth to slow to 2% by the fourth quarter. A recession, while possible, isn't likely.

Soaring subprime defaults have rippled through the mortgage and broader credit markets. Lending has been choked off, with tens of thousands of real estate jobs lost in just the past several weeks.

Yet, outside of housing, the U.S. is expected to weather the storm, economists say. Strong global growth and the weak dollar are fueling an export boom, and corporate profits remain healthy.

Recent data have been mixed. Industrial production and consumer spending have held up relatively well, while exports are strong.

"The economy has a number of fundamental strengths that will ultimately win the day," Mark Zandi, chief economist at Moody's, wrote in a report this week.

But the housing slump is deepening, the U.S. lost jobs last month for the first time in four years and consumer confidence has fallen.

Fed chief Ben Bernanke has said the central bank would act if the credit crunch threatened the economy. But the central bank noted in its latest recent beige book report that creditworthy businesses and individuals have had little trouble getting loans.

There are signs that the credit crunch may be easing. On Thursday, the Fed reported that commercial paper outstanding fell just $8.2 billion in the week ending Sept. 12, well below the previous week's $54.1 billion drop and the smallest decline since early August. That's a sign that businesses are having less trouble raising money to fund their operations.

But the Fed also said late Thursday that banks had tapped $7.2 billion from its discount window as of Wednesday, the most since 2001.

Nearly all analysts expect the Fed to cut the fed funds target rate next week, saying the risks to the economy have become too big to ignore.

In setting policy, the Fed has to "make their best judgment about what's going to happen in the future," said Nigel Gault, director of U.S. research at Global Insight.

He expects a 25-basis point cut to 5%, saying that the credit crunch "threatens the economy enough to warrant it."

Others see a 50 basis-point cut.

Some on Wall Street have grumbled that Bernanke is taking too long compared to his fast-acting predecessor, Alan Greenspan.

But Greenspan said Bernanke is doing an "excellent job" in excerpts released Thursday from a "60 Minutes" interview. He said he might not have acted quickly this time, given inflation risks.