Transcripts

Recession or Recovery? Where Is The Economy?

SUSIE GHARIB: While the credit crunch has left the nation's banks in a mess, fresh data out today is raising new questions about the health of the U.S. economy. The Institute of Supply Management's index of manufacturing activity rose to 49.6 percent in May from 48.6 percent in April. It is the first major snapshot of the economy in May and a reading below 50 suggests the manufacturing sector is contracting. But is that true for the overall economy? Suzanne Pratt reports.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Are we or aren't we in recession? That's the big question currently facing the U.S. economy. Even though some recent economic data has been a bit stronger, the majority of economists believe the U.S. is already in recession or soon will slip into one. A recession is generally defined as two consecutive quarters of negative growth. But it's a panel of experts at the National Bureau of Economic Research that ultimately decides whether the economy has fallen into recession. And it considers other factors, too, such as employment and income. IMF Chief economist Simon Johnson says for anyone pinpointing the start, it's a tough task.

SIMON JOHNSON, CHIEF ECONOMIST, IMF: It's always hard to know when it starts, when it doesn't start. You need quite a lot of hindsight to figure that out. It looks to us like you're very close to negative, the kind of negative growth that leads people calling it a recession, subsequently

PRATT: Johnson is in good company. Former Federal Reserve Chairman Alan Greenspan declared just last week that a recession was probable. His successor, Ben Bernanke, has been more sanguine, saying only that one was possible. On the other hand, President Bush has said the economy is not in recession, but in a slowdown. While that's the minority view, there are plenty of economists who predict the U.S. will skirt recession. Barclays Capital economist Julia Coronado says we will escape one because monetary and fiscal policy are providing tailwinds.

JULIA CORONADO, SR. ECONOMIST, BARCLAYS CAPITAL: There's the fiscal stimulus coming into play. We think that's going to help boost growth in the second half of the year and the Fed cut rates very early and very aggressively. And we think that's going to work its way into the economy in the second half of the year. So, the combination means that we will see a modest pickup going into the second half.

PRATT: But does it really matter whether 2008 will be labeled an official recession year or simply a period of prolonged anemic growth? Deutsche bank economist Joe Lavorgna says it only makes a difference if you're worrying about the direction of interest rates.

JOSEPH LAVORGNA, CHIEF ECONOMIST, DEUTSCHE BANK: If you believe that because we dodged a recession, the Fed now has to raise rates which some pockets of the market believe then that's a big deal. But we believe that whether it's recession or no recession, the period of growth is going to be extended and be weak for such a long time that the Fed will not be raising rates anytime soon.

PRATT: The National Bureau of Economic Research typically does not announce a recession until it's well underway. For that reason, the recession debate is likely to carry on for many more months. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.