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Teetering on Edge of Recession


Don't bet against the U.S. consumer, economists usually caution. But a lot of people are betting on a recession this year.

Online traders put the odds of a U.S. recession at 62%, up from 46% a month ago, according to Intrade, a unit of Dublin, Ireland-based Trade Exchange Network.

The forward-looking pending-home sales index fell 2.6% in November, the latest sign that housing has yet to find a bottom.

Other economic data also suggest darker days ahead.

Unemployment has spiked to 5%, manufacturing is contracting, oil has hit $100, holiday sales were sluggish, and business spending has stalled.

The R-Word

"A lot of things are teetering on the edge of tipping toward a recession," said Lakshman Achuthan, managing director of the Economic Cycle Research Institute.

Stocks reflect the gloom, with heavy selling on Tuesday after AT&T warned of weak consumer demand. The Nasdaq has fallen 14.7% from its October peak, while the S&P 500 is down 11.8%.

The 10-year Treasury yield has dropped 25 basis points to 3.78% on sentiment that the Federal Reserve will keep cutting rates.

Futures traders unanimously expect at least a 25-basis-point cut to 4% at the central bank's Jan. 29-30 meeting, with most expecting a half-point move. The Fed has already slashed borrowing costs by a full percentage point since September.

"I think if we move from where we are today by another 100 basis points during 2008 it would probably be a good thing for the economy," said Martin Feldstein, head of the National Bureau of Economic Research, the official arbiter of U.S. business cycles.

Feldstein, citing a "serious risk" of recession, also told CNBC he would like a fiscal stimulus package to bolster the economy.

President Bush has said he's mulling a stimulus plan, but he offered no details.

While a recession is typically defined as two straight quarters of the economy contracting, NBER defines it more broadly as a "significant decline in economic activity spread across the economy, lasting more than a few months."

NBER often takes several months, even years, to call the start and end of recessions.

Evidence that the slowdown is spreading beyond the long-suffering housing sector has grown.

Last week, the Institute for Supply Management's factory index slumped below 50, signaling contraction. Export orders, which have helped offset the drag from housing, also slowed amid signs of economic head winds in Europe, Canada and elsewhere.

Employers added just 18,000 jobs in December, the lowest in more than four years. The jobless rate jumped to a two-year high of 5%.

Some economists say the rise in unemployment in recent months heralds a recession.

But others argue the data aren't weak enough to call an end to the six-year expansion just yet.

"The recession talk has gotten a bit ahead of itself," said Mark Vitner, an economist at Wachovia.

But, he said, "Clearly the economy is struggling. If we avoid a recession, as we expect to, we'll still have very weak economic growth."

Some observers worry that a Fed rate cut could fuel inflation, which is already running hotter than the Fed would like.

The National Federation of Independent Business said Tuesday that 16% of small-business owners reported higher selling prices in December vs. 9% in September. Meanwhile, the number of businesses planning to raise prices rose to 26%.

"The percent of owners reporting higher prices suggests that inflation will be showing some new, unwanted viability," said NFIB Chief Economist William Dunkelberg.

But many say the slowing economy will naturally cool prices, giving the Fed plenty of room to cut.

The NFIB's overall small-business optimism index edged up in December, but just off a 14-year low.

The ECRI's leading U.S. index ticked higher in the latest week. But the annualized growth rate fell to -6.2%, the weakest since Nov. 16, 2001, at the end of the last recession.

"If these downward trends in the leading indicators continue for much longer, we will end up with a recession," Achuthan said.

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