The Recession
Might Not be Mild

People who make a living forecasting the economy say that there is more than the usual amount of uncertainty these days. Considering their poor track record in predicting the shape of previous recessions, that's quite an admission.

The consensus forecast -- a blending of individual forecasts that is a better guide to the future than any particular one -- is almost encouraging. It foresees a milder recession than those that afflicted the U.S. in 1973-74 and 1980-82, and predicts that the economy will be growing again by spring, around the time of opening day of the 2002 baseball season.

It's a reasonable case. It might even prove true. Wednesday's government report that the economy shrank at only a 0.4% annual rate in the third quarter is comforting. But the case rests more on hope and history than on a convincing explanation of how the economy is working right now. Economic forecasters, by nature, ignore that which isn't easily measured or predicted, the very things on which the economy now turns -- how consumers and executives will respond to repeated, vague alerts about more terror, for instance.

THE CONSENSUS STORY GOES like this: The economy was weak all summer, hurt by the bursting of twin bubbles -- the stock market and business spending on high-tech equipment. Businesses were stuck with unwanted inventories of unsold goods, so they cut back on orders. But the Federal Reserve came to the rescue early. A tax cut conceived before the slowdown arrived at the perfect moment. So, despite recession talk, the typical forecast before Sept. 11 envisioned painfully slow growth, not a contracting economy.

Sept. 11 wiped out the lingering hope that the U.S. might skirt recession. (Actually, readings on employment taken before Sept. 11, but released afterward, suggest that the economy was near recession before the planes hit the World Trade Center.) Even though most economists were surprised that Wednesday's report on the third quarter wasn't worse, the consensus still is betting that the fourth quarter will be bad.

After that, the consensus view goes, things will get better because the worst will be behind us. Businesses already have pared their inventories, so they'll be ordering. Housing, which usually crumbles early in a recession, remains hearteningly healthy. Prices of oil and natural gas are behaving. Americans, lured by 0% financing, are buying lots of cars. The Fed is still cutting interest rates, even though earlier rate cuts haven't yet been fully felt. Congress is preparing another dose of fiscal stimulus. And, at least until this week's reversals, the buoyancy of stock prices and consumer-confidence polls offered supporting evidence.

THE LOGIC OF THE CONSENSUS is unassailable, though some forecasters are patriotically reluctant to be prematurely pessimistic. That's unusual in a business where extreme, attention-grabbing predictions are seen as smart marketing. "After the attack, you want to see the glass half full, so you can pour the other half on bin Laden's head," says Hoenig & Co. economist Robert Barbera.

But the forecast obscures much of what will determine whether this recession proves mild, or worse. As John Maynard Keynes wrote 65 years ago, "Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."

The mild-recession scenario starts by assuming that nothing bad will happen. The U.S. will avoid another jarring act of terrorism, another big plunge in the stock market, fallout from Argentina's possible default on its foreign debt, a lengthy disruption of the U.S. mail and anything that lifts oil prices. Yet each of these unhappy events would whack the economy, and no one sensible can rule them all out.

Then the forecast is built on the usually reliable patterns of history. Gauging the economic effects of Sept. 11 requires the application of an appropriate historical metaphor. But none seem to fit. The terror threat isn't as transitory as an earthquake or as far from U.S. shopping malls as the Gulf War, and it won't stoke the economy with a surge in defense production like World War II or the Vietnam War.

And the prelude to this recession wasn't usual. This time, the recessionary seeds were planted by a plunging stock market and an abrupt end to a business capital-spending boom. Business spending on equipment and software has been falling for a year now, and it is far from clear what will restore the optimism required to revive it. The latest anthrax headlines don't help.

It's not that the mild-recession forecast is clearly wrong. But if it's wrong, it's probably too optimistic. That's why Fed Chairman Alan Greenspan, who already has cut interest rates to 2.5% from 6.5% in 10 months, continues to cut them -- even though he still believes that information technology promises a brighter economic future. That's why President Bush's advisers are so edgy about the political stalemate over economic stimulus. All it takes to put the economy in the tank is for lots of businesses and consumers to get a little more cautious and pull back at the same time.

-- David Wessel

Write to David Wessel at capital@wsj.com