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Recession Window Closing Fast


The U.S. economy is within mere weeks of tumbling into a recession, according to the head of what many economic experts consider the country’s leading recession caller. The dismal assessment suggests the $100-billion-plus economic stimulus package being assembled this week by the White House and Congress could be too little, too late to stave it off.

In comments to Financial Week, Lakshman Achuthan, managing director of the Economic Cycle Research Institute (founded by Geoffrey H. Moore, considered “the father of leading indicators”), said last week the institute’s growth indicators have fallen to their lowest levels since the recession of 2001. “In a word, I’m saying the economy’s state is ‘precarious,’” Mr. Achuthan explained in an e-mail, adding that “the self-reinforcing downturn that leads to recession has begun.”

A recession could still be averted by “prompt policy action,” Mr. Achuthan said, but he noted that any action out of Washington must happen with unprecedented speed. “The current window of opportunity for policy stimulus is limited to a matter of weeks, or maybe a month. The reason for the opportunity is that we do not [yet] have an inflation spiral in front of us, high energy prices notwithstanding, and manufacturing is being supported a bit by exports.... [But] if the decline in our leading indexes gets much greater, then the window of opportunity to avert recession will have closed.”

As more economists and politicians joined the recession-at-hand bandwagon, President Bush last Friday unveiled his proposal for an economic stimulus package. The plan, which could come with a price tag as high as $150 billion, would focus mainly on one-time tax rebates for individual taxpayers, but would also grant tax incentives for business investment. Mr. Bush said any stimulus package should cost at least 1% of the current $14 trillion gross domestic product.

Federal Reserve chairman Ben Bernanke warned the House Budget Committee last Thursday that fiscal stimulus could be inflationary if it persists after recovery has begun. “Fiscal measures that involve long lead times or result in additional economic activity only over a protracted period, whatever their intrinsic merits might be, will not provide stimulus when it is most needed,” said Mr. Bernanke, adding that a stimulus package should be implemented so its effects are felt by the end of 2008.

The Fed chief said a fiscal package could also “prove quite counterproductive” if the stimulus arrived at “the wrong time or compromised fiscal discipline in the longer term.”

Congress may unveil a final plan by the Jan. 28 State of the Union address, and corporate lobbying groups have been fighting to get tax breaks and other benefits into such a package. A bipartisan contingent of influential tax-drafting lawmakers on the House Ways and Means and Senate Finance committees are debating such cuts.

During a hearing last week of the Joint Economic Committee, chairman Sen. Charles Schumer (D-N.Y.) said “targeted business tax cuts” could help stimulate job creation. Sen. Max Baucus (D-Mont.), who chairs the Senate Finance Committee, plans to hold two hearings on economic stimulus proposals later this week that may focus on such tax cuts. Congressional leaders plan to meet with administration officials Tuesday to hash out the details of Mr. Bush’s plan.

It’s impossible at this point to tell which proposals will make the cut. But if the final stimulus package is priced at $100 billion to $150 billion, that could leave some room for business-friendly tax incentives. Business incentives stand an even better chance if Congress waives the current rules that require tax cuts to be offset by revenue-raising provisions or cuts in spending elsewhere.

At the top of the heap are accelerated depreciation on bonuses and technology investment, and a temporary tax incentive for corporate investment, both of which were proposed earlier this month by the U.S. Chamber of Commerce.

However, that hasn’t stopped key lobbying groups from pushing for other pet projects. One suggestion gaining traction is to renew and expand the R&D tax credit, which expired last month. Extending the credit wouldn’t be an expensive solution—the Joint Committee on Taxation said a proposed extension that did not pass Congress last year would have cost roughly $9 billion over ten years—but some question whether it would free up capital immediately. R&D budgets sometimes span five years, and some critics say extending the credit now will not lead to job creation or greater corporate investment.

Other groups want to take the R&D credit further. The Information Technology Industry Council would like to renew the credit and expand it from the current 12% to 20%, and from a one-year extension to a two-year extension so companies know it will be in place in 2010. “It’s a missed opportunity to just extend it,” said Ralph Hellmann, senior vice president of government relations at the council.

A few ideas that are popular among business groups but are unlikely to make the cut in a temporary and timely stimulus package include a reduction in the corporate capital-gains rate, from 35% to 15%, and greater spending on infrastructure. A report last week by the Congressional Budget Office said a general reduction in the corporate tax rate would not be cost-effective, adding that tax credits for corporate investments or accelerated depreciation would be the best ways to draw corporate capital into the markets.

A House Democratic aide involved in putting together the stimulus package said accelerated depreciation is being seriously considered, though it is not universally supported, but that many initiatives are mere “ornaments” on the stimulus “Christmas tree” and won’t be added. “I scratch my head a bit” at all pitches from lobbyist groups, he said.
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