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Wednesday, 9 October, 2002, 20:42 GMT 21:42 UK
Stock fall fuels recession concern
ISM manufacturing graph
After roaring back to strength, US factories have flagged

With US stocks continuing a marked tumble that began in August, some analyst predictions of an extended period of brutal economic turmoil are gaining credibility among distressed American investors.

The processes of correcting [market imbalances]... are not something that you can do in one business cycle

James Glassman, economist
Books and newsletters warning of economic crashes and stock-market routs that rival the Great Depression have been around for years.

But with the current recovery imperilled, several publications warning of economic doom-and-gloom have made bestseller lists across the country.

Some authors point to the slide in technology stocks traded on the Nasdaq market and its similarity to the crash of 1929.

Since reaching a high of 5,132 in March 2000, the Nasdaq Composite Index, a measure of stock performance, has fallen 78%, leaving it only 11 points shy of the 89% drop in industrial stocks ahead of the 1930s depression.

Economic ills

One of those warning of further economic pain is David Levy of the Jerome Levy Forecasting Center, an economic-research firm.

Nasdaq Market Site display in Times Square, New York
Nasdaq's key index has lost 78% of its value
His latest newsletter bears the ominous headline "The Global Depression of the '00s".

Mr Levy says there is a greater than 60% chance of returning to recession in the coming months.

What is more, he lists a whole host of economic ills, yet to be worked out, that could bring the world's economy to its knees.

Those include problems such as too much debt, the burst stock market bubble and excess capacity in global industry.

"The processes of correcting these things... are not something that you can do in one business cycle," he says, referring to the time span of economic activity.

Efficient markets

While Mr Levy has painted a rather bleak economic picture, others are not quite so quick to call the recovery down for the count.

A lot of investors don't trust financial statements right now

James Linck, finance professor
"The doom-and-gloom prognosticators? I tend to ignore them," says James Linck, a professor of finance at the University of Georgia in Athens.

He says the current rout in stock prices has more to do with cagey investors than with flawed economic fundamentals.

"A lot of investors don't trust financial statements right now." Professor Linck cites scandal-ridden Tyco International as such an example of investor wariness.

"If you could believe the numbers [Tyco] reported in their financial statements it looks likes it's severely undervalued," he says, referring to the firm's stock price in relation to its profits.

"But people don't know if they can believe [the numbers]," he says.

Growth potential

Other analysts take issue with comparing the loss in value of technology stocks over the last two years with the crash of 1929.

"To look at market moves out of context of the period that you're in and what's going on is kind of bizarre to me," says James Glassman, chief economist at investment bank JP Morgan Chase.

The problem Mr Glassman has with the comparison is the argument pretends the '90s economic boom was a bubble and nothing new has happened since 2000 that might justify why markets might be down.

The book
Some books are warning of doom and gloom
"It's an old-fashioned concept that markets go up and down, and there is nothing really changing in the world that might make markets move," he says.

While he admits there is a great deal of disagreement among economists about what the US economy can sustain, he also says conventional wisdom among economists over the last decade has changed drastically.

"We thought that the growth potential in the US was only 2% to 2.25% because productivity had slowed down all around the world to 1% annually, and that's just what we've got to live with."

Today, he says, analysts are wondering whether the growth potential of the US economy is 3.5% to 4%.

Economic hardship

Yet even as he warns of economic depression, forecaster Levy concedes it is not likely to look like any we have already seen.

The United States, Europe and Japan, are going to go through what Mr Levy calls a "contained depression".

"It's a term we first developed in 1990 to describe the early '90s period, where you're muddling through," he told BBC News Online.

"It can be a difficult time, but it's not a great depression."

He has far greater concern for nations with developing economies, which do not have governmental safeguards - unemployment insurance, bank deposit insurance, etc - such as those in the US and Europe.

Mr Levy says the world has already witnessed examples of severe hardship within Argentina and Indonesia, where a breakdown has caused lasting damage to markets, banks and even the government.

Whether the world economy can weather another economic downturn remains to be seen, but the ongoing stock sell-off is not helpful.

As JP Morgan's Glassman says, "Investors have been so badly shaken, it's going to take some time to get their confidence back."

Economic indicators

Fears and hopes

US Fed decisons

See also:

08 Oct 02 | Business
04 Oct 02 | Business
02 Oct 02 | Americas
03 Oct 02 | Americas
29 Sep 02 | Business
25 Sep 02 | Business
12 Sep 02 | Business
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