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Trade Center Attack Masks Economic Reality

Economists are rushing herd-like to write recessions into their forecasts for the US, but one who has been ahead of the herd is angry that terrorists are getting the credit.

The head of research at the Economic Cycle Research Institute in New York, Mr Anirvan Banerji, has been insistently predicting an American and global recession for months.

"Forget about the terrorist attack; the economy was already in recession and was heading deeper," he said.

It's true, he agrees, that the attack has worsened the outlook: "They hit the economy when it was down, and the effect surely cannot be good."

"But it would be outrageous to give the terrorists the credit for a US recession - it would give them a propaganda victory they don't deserve."

It is plain that the US economy was already in an enfeebled state before the hijackers took control of the four aircraft last week. As the Federal Reserve said on Monday in announcing the latest cut in official interest rates: "Even before the tragic events of last week, employment, production, and business spending remained weak."

And that rate cut, and more like it, were already in prospect. As the Zurich Group's Mr David Hale said of the annual Fed retreat in Wyoming, which he attended, "at Jackson Hole three weeks ago there was already a sense among the Fed people there that more needed to be done" than the markets were expecting.

But how can Mr Banerji contend that the country was already in recession?

The conventional definition of recession is two consecutive quarters of contraction in GDP, and the US has not yet registered even one.

"The official definition of recession, the one used by the National Bureau of Economic Research, does not use GDP," Mr Banerji said.

"It's industrial production, it's unemployment. Look at industrial production: it's been falling for 11 consecutive months, the longest in the postwar era, matching 1960-61."

"No fall of that duration has ever occurred outside a recession. Look at unemployment. The biggest rise in unemployment ever to occur outside a recession was 0.4 per cent, in 1966-67."

"So far this time it's gone from 3.9 per cent to 4.9 per cent, up a full 1 percentage point."

"So the indicators that officially define recession have already behaved in a way only ever seen in recession, and GDP will surely follow."

The rush in the last few days by economists to revise their forecasts from recovery to recession has less to do with the terrorists, Mr Banerji suspects, than with the economists.

Having misread the economy, they were using the attacks on New York and Washington as an excuse, a cover for their own failings as forecasters, he said.

Among the investment houses to revise their forecasts from near-term recovery to imminent recession are JP Morgan, Goldman Sachs and the ISI Group.

"They should not do this at the expense of handing victory to the terrorists," Mr Banerji said. "They were targeting our free market economy giving them credit gives them some victory."