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The 'R' Word Is Far From Dead

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"The most dangerous thing is illusion," Robert Louis Stevenson wrote.

Take the state of the economy, in particular the widely held view that the recession is kaput. That could also be one of those illusions, some economic trackers suggest.

Like a lot of folks--maybe you're one of them--I thought the economic anguish of recent years was over and done with, given a string of 10 consecutive monthly gains in the leading economic indicators, a knockout of a fourth-quarter GDP increase (a recently upward revised 5.9%) and Ben Bernanke's reaffirmation the other day to maintain low interest rates for an extended period.

But like Dorothy discovered in the Wizard of Oz in her quest to get back to Kansas in a hurry to see Aunty Em, what seems obvious and easily achievable is often not as obvious and easily achievable as it's supposedly cracked up to be.

Over the past month or so, talk of a double-dip recession has all but disappeared. But I've come across a trio of sharp economists who argue it's too soon to come to such a happy conclusion. Each, in fact, holds the view one could be looming on the horizon.

One of them is outspoken Peter Morici, the professor of economics at the Robert H. Smith School of Business at the University of Maryland. "Not only is the economy not out of the woods yet, but there's a one in three chance that we could see a double dip," he tells me. Some of his key reasons:

--The growing trade deficit (up 10.4% in December to $40.2 billion), which is sapping off demand for U.S. goods and a problem which the President shows no interest in fixing.

--Plummeting home sales (Existing home sales fell 7.2% last month, while existing home sales tumbled 11.2% to a record low).

--The Federal Reserve's shoddy handling of the banking crisis, namely its decision to bail out the big New York banks, while ignoring the 8,000 regional banks.

--Weekly jobless benefit claims remain above 450,000 when 350,000 is healthy.

If indeed a double dip occurs, Morici says, "we could see 15% unemployment (it's currently 9.7%) and the stock market will surely tank."

Currently, he sees first-quarter GDP rising 3%, which he views as slow growth when we're supposedly coming out of a recession.

This past week, TrimTabs Research, a West Coast liquidity tracker partly owned by Goldman Sachs and a persistent economic bear, switched to the bullish camp after concluding the economy had bottomed in January. Why such a switch? Because, explains TrimTabs' economics skipper, Madeline Schnapp, of modest year to year growth in income tax withholdings (meaning increased wages and salaries), rising employment demand and growing purchases by companies of their own shares. This buying indicates Corporate America sees better times ahead both for the economy and the stock market.

Sounds good, except a chat with Schnapp finds she's hardly sold on the idea that we're home free of the "R" word. In fact, she views a double dip recession as a "real possibility" and thinks we have a 50-50 chance of heading in that direction.

Schnapp's biggest worry centers on a number of huge lurking headwinds, which could turn into hurricanes and derail the economic recovery. These are continuing credit losses from near-record mortgage delinquencies, rising delinquencies in commercial real estate, spiraling bank failures from credit losses and the possibility of higher interest rates if Treasury auctions fail to attract sufficient low-yield buyers.

A possible blow-up of the sovereign debt crisis is another concern, notably the high deficits of Greece, Spain and Portugal, a reflection of their off balance sheet commitments, such as currency swaps.

Taking note, too, of our staggering debt load, a reference to the ballooning budget deficit, pegged at $1.4 trillion in fiscal 2010. Schnapp observes the U.S. has massive financial commitments. In brief, it has to sell $1.8 trillion of Treasuries within a year and borrow a total of $2.5-$3 trillion to finance the deficit and repay short-term debt. But that's an open question, she says, pointing to the December sales of Treasuries by Russia and China, which reduced their holdings by $44 billion.

Our economic recovery is dependent on stable interest rates, notes Schnapp, and if demand for Treasuries decline, interest rates would go up. And that, she says, would destroy our economic recovery.

Our remaining economist who envisions a possible double-dip recession is JC Spender, professor of economics at the Open University School of Business in Milton Keynes, U.K. There's at least a one in three possibility, he believes. "Just look at the news," he tells me. "It's not good on the jobs front. It's not good in housing. It's not good in consumer confidence. And it's not good from Greece."

Spender also took pot shots at Wall Street, observing "it's telling us it's avoiding the fate of Main Street and the unemployed in Europe, that it has won the battle against Obama and it's business as usual, even though it has done tremendous damage to the American people. Wall Street," he went on to say, "has exposed us to a substantially diminished view of America to the world and should return to the banking it did 20 years ago when it was boring and it provided a good underpinning to the economy."

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