Will the current ongoing slowdown in the US economy, which many people term as a a profit recession, intensify into a full-blown recession?

If the latest issue of GREED & fear, a publication brought out by ABN Amro Asia is anything to go by, there is a 70 per cent chance that it will.

The major reason for this, the publication feels, is that the cutback in American consumer spending resulting in lesser expenditure and therefore reduced demand in the economy. The document has based its opinion on the consumer expectations index, which looks a lot more bearish now at this point of time. This is in contrast to actual consumption patterns, which in comparison look more robust. However according to the publication, "This fits the normal pattern going into a recession. Consumers become concerned first but actually stop spending later."

Will this anticipated recession reflect in American companies proactively cutting jobs? At least not immediately, feels GREED & fear. The publication states that American companies have been operating for years in a climate of labour shortage just as the Japanese did in the eighties. Hence, their initial reaction will be to hoard labour.

This, the publication tries to prove, by using Wall Street as an example, where the job cutbacks have not been spectacular considering the stupendous drop at the Nasdaq and collapse of investment banking prospects. But this phase is likely to be short lived and job losses can only rise as uncertainty grows and the uncertainty is best measured in the weakening of the equity markets and rising corporate bond spreads.

The publication also states that there were 5,522 extended mass layoff actions in America in calendar 2000 resulting in 1.12 million workers being separated from their jobs for more than 30 days. This is compared to 1.15 million in 1999 and 1.23 million in 1998, the lowest annual level since the series was started by the Bureau of Labour Statistics in the 2^nd quarter of 1995.

What are the positives?

The reasons why GREED & fear has not accorded 100 per cent probability to the possibility of a full-blown American recession are two-fold. One, continued strength of the dollar and two, relatively robust demand for housing. The continued strength of the dollar is likely to ensure that the current consumption addiction is likely to continue for sometime due to "the cultural propensity of the Americans to consume". The robust demand for housing is largely due to continued surge in mortgage refinancing, which is putting more money in consumers' pockets.

Asian countries, minus Japan, can do better

America remains the dominant issue for Asian stock markets, given the continued evidence of US contagion. In fact this has been a growing reality for all international equity markets. The correlation between the MSCI US index and MSCI All Country World Free ex-US index has been running at an extraordinary high of 0.88 since the beginning of 1999.

However, in the first quarter of calendar 2001 while MSCI All Country Asia Free ex-Japan index went down by 5.1 per cent, the MSCI All Country World Free Index went down by 13 per cent and the S&P 500 by 12 per cent. This means that Asian countries, minus Japan, stand a good chance of doing better despite the ongoing US contagion. The biggest risk to this relatively positive view is the perverse US dollar strength. The biggest positive is that the MSCI All Country Asia Free ex-Japan benchmark index has reached its support level of 190, closing at 189 on 4 April. If this is breached, the next support would come at the Asian crisis low of 137.

If any news can spark the desired rally, it would have to come from the Federal Reserve, which will have to cut the Fed Funds rate by at least 100 basis points. In such a context interest rate sensitive Hong Kong and Singapore would probably lead a rally. For such a dramatic thing to happen however, Allan Greenspan will have to admit that there is more to the ongoing downturn in the economy than just a cyclical inventory correction. " This may not yet be psychologically possible for Pinball Alan", says the document.

Analysts hopeful

Despite the probability of lower earnings starkly facing them due to the possibility of a full blown recession ahead, bottom-up analysts in the tech sector continue to refrain from putting a sell call on their stocks. "The only explanation for this is that they assume that demand is about to come back. Unfortunately, there is no evidence of this yet", says the publication. It points out that the global semiconductor unit sales fell by 2.8 per cent year on year in the first two months of this year compared with a high of 36 per cent touched in December 1999. It adds, " A final negative is that there is as yet no signs of a significant cut in production."