(cache) Recession? Not So Fast, Say Some

A funny thing happened to the economy on its way to recession: It's taken a detour.

That, at least, is the view of a growing number of economists -- including some who not long ago were saying a recession was all but inevitable. They note that stock and credit markets have steadily improved since the Federal Reserve intervened to keep Bear Stearns Cos. from bankruptcy in early March, while a series of economic reports have been stronger than expected.

CHANGING BAROMETER

• The News: Retail sales, excluding autos and parts, were surprisingly firm in April.

• The Upshot: Consumer spending and the U.S. economy continue to grow, suggesting recession is not a foregone conclusion.

• The Risks: It could be that the data will worsen in coming months, raising the risk of a shallow but lengthy recession.

Economists also cite swift policy responses, including a sharp reduction in interest rates by the Fed -- to 2% from 5.25% last September -- and the distribution of fiscal-stimulus checks to millions of Americans, as factors possibly easing the downturn.

"A couple months ago it seemed like we were on the abyss," said Jay Bryson, global economist with Wachovia Corp., referring to the seizing up of credit markets and the collapse of Bear Stearns. "Things have changed....The numbers we've seen recently haven't been as bad as we were led to believe just a few months ago."

Wachovia now puts the odds of recession at 45%, down from 90% in April, and expects growth in gross domestic product of 0.6% at an annual rate in the first and second quarters of this year, followed by 1.2% growth in the third and fourth quarters. While he doesn't expect a recession, he says growth will be very weak through next year.

Indeed, plenty of economic warning signs remain, as reflected in plunging consumer confidence data and polls reflecting deep unease among voters. Rising prices for food and other commodities are prompting Americans to trim some spending and stoking concerns about inflation. The ongoing run-up in oil prices has pushed the average price of a gallon of gasoline to $3.73 as of Tuesday, according to AAA, the automobile group. Home prices continue to decline and many economists expect that to depress spending in the months ahead.

Yesterday, Federal Reserve Chairman Ben Bernanke, while noting that market conditions have improved in recent months since the Fed's actions, also cautioned that they "are still far from normal." (Please see related article.)

REAL TIME ECONOMICS

• Read the latest news and analysis on the economy at WSJ.com's Real Time Economics blog.

Still, Mr. Bryson and other economists note that though two main pillars of the economy, the labor market and consumer spending, have faltered, they have not collapsed as they did in past recessions. On Tuesday, the Commerce Department said retail sales fell a slim 0.2% in April from the previous month -- a decline due mostly to a steep drop in auto sales. Excluding autos, retail sales climbed 0.5%.

Job losses, meanwhile, have been less severe than they usually are in recessions. And many economists think the government's earliest estimate of first-quarter GDP growth -- 0.6% -- will be revised upward. After reviewing the retail-sales data, economists at Global Insight, a Waltham, Mass.-based forecasting firm, predicted the government would increase its assessment of GDP growth in the first quarter to 1% at an annual rate. They forecast continued growth in consumer spending, partly because of tax rebates and stimulus checks.

In February, Global Insight joined Goldman Sachs, Morgan Stanley, UBS and Merrill Lynch in declaring the U.S. to be in recession. Now, Global Insight's Brian Bethune says that while the firm is still forecasting a recession, "it's conceivable we could avoid it," thanks to "the massive policy response we've seen" since he and others began warning about the risks facing the U.S. economy.

Bruce Kasman, chief economist at J.P. Morgan, said while earlier this year it seemed like momentum was carrying the economy into a clear recession, there's only "a slightly better than even chance" of a recession now. "Even though there are meaningful drags from the credit crisis and energy costs, the economy is showing resiliency," he said.

The question remains open, since recessions typically aren't officially diagnosed until some time after pain hits consumers. A common definition of a recession is at least two consecutive quarters of negative GDP. But the National Bureau of Economic Research -- the nonprofit group that is the official arbiter of when recessions begin and end -- defines a recession as a period of significant decline in economic activity across GDP, income, employment and retail sales that lasts more than a few months.

John Lonski, Moody's chief economist, said recent labor market data and signs the credit crunch is easing on Wall Street have made him less gloomy than he was a few months ago. In the latest WSJ.com survey of economists, conducted in May, he said the likelihood of a recession was 60% -- down from the 90% he predicted in the April survey.

"Recent evidence suggests there's a chance the economy might stabilize before this summer," he said. On average, the 55 economists in the survey, conducted earlier this month, said the likelihood of a recession was 62.7%, down from 70%.

Claims for unemployment benefits -- which typically rise well above 400,000 a week during recessions -- have stayed well below that level, and fell last week. In addition, the economy isn't shedding hundreds of thousands of jobs a month, as it usually does in an economic contraction. In April, employers cut just 20,000 jobs, and the unemployment rate fell.

Even Alan Greenspan, who in early April said the U.S. was in the "throes of recession" and is going through the "most wrenching" crisis since World War II, has more recently toned down the warnings, saying the U.S. is in an "awfully pale recession." George Soros, who has long argued the U.S. is headed for a major crisis, also recently remarked that the "acute phase" of the crisis has now passed.

To be sure, even economists who are becoming more upbeat say the U.S. may be in for a period of protracted sluggish growth.

"I think the problems are just starting," said Lehman Brothers economist Drew Matus, citing high gasoline prices and tightening lending standards, saying that prolonged stagnation can be worse than a recession.

Asked in an interview with The Wall Street Journal whether the U.S. could avoid a recession, Gary Stern, president of the Federal Reserve Bank of Minneapolis, said, "No," adding, "But there are recessions and then there are recessions....The average resident doesn't distinguish between whether the economy is growing half a percent or one and a half percent....It's more, how does this feel?"

The rise in commodity prices has hit import prices, which rose 1.8% in April from the previous month, after a revised 2.9% gain in March, the Labor Department said Tuesday. Compared to April 2007, import prices are up 15.4%, the largest annual rise since the data were first published in 1982. Even excluding petroleum, import prices rose 6.2% over the year, the highest since 1988.

With pump prices rising, Americans already have begun to reduce their fuel usage: Gas-station sales dropped 0.4% in April from the previous month.

--Greg Ip contributed to this article.