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Downturn? Yes. Recession? No

The opinions expressed by columnists are their own and do not necessarily represent the views of

WASHINGTON -- With all the economic gloom and doom we're hearing on the nightly news, it should be noted that not everyone believes we are heading into a recession.

We've been hearing the mantra of recession over and over again for sometime now. It was a drumbeat throughout 2007 from people who had their own political agenda. But barring the expectantly low fourth-quarter gross-domestic-product (GDP) numbers due out this week, for the most part the economy's fundamentals performed quite well -- turning in a nearly 5 percent economic growth rate in the third quarter.

Right now, however, the economy -- housing, mortgage foreclosures and the financial sector -- is going through a rough patch, but it is unclear how deep this downturn will be and how long it will last. The gloom-and-doomers say it's going to last a long time and send the overall economy spiraling into more than two consecutive quarters of lackluster growth.

But some very credible economists think this isn't going to happen for a number of reasons -- chiefly, that steps are being taken to prevent it, including deep interest-rate cuts to make it easier for businesses and consumers to borrow money and a stimulus bill to pump needed cash into the hands of taxpayers.

"The current perception is that the bottom has suddenly fallen out of the economy. Instead, we think we're in the expected two-quarter hiatus between the pipeline of projects funded with securitizations and the still-developing pipeline of projects funded with 'new' techniques (bank loans, internal funding, equity capital)," said chief economist David Malpass at Bear Stearns.

A month ago, Malpass was sounding much more bearish about the economic environment, suggesting that we were in for a long, difficult haul before we saw the end of this downturn.

Then came the Federal Reserve Board's pro-growth interest-rate cuts that have "effectively glued together the punch bowl of excess liquidity," which will help get us out of this, he said last week. As a result, "we're changing several of our views."

Among the changes:

-- "We think the recession risk for 2008 is now 10 percent," compared to 20 percent after the Fed's Sept. 18 rate cut.

-- "We're raising our gross-domestic-product forecasts for the second, third and fourth quarters of 2008 to 3 percent (they were 2 percent, 2.5 percent and 2.5 percent)," following 1 percent GDP for the first quarter.

One of the key changes that will eventually alleviate the subprime housing crisis is falling home-mortgage interest rates that are going to lure homebuyers back into the market.

Although it's not getting as much attention as it deserves, mortgage rates are falling significantly, now well below 6 percent. A major bank in the Washington, D.C., area was offering a 5.1 percent, 30-year mortgage to a middle-income, first-time homebuyer with good credit and 20 percent down.

"Housing is a key variable in the intensity and longevity of this new climate," Malpass said in his latest weekly Wall Street memo to clients and interested parties. "We think there is a material chance that the lower mortgage rates will cause a U.S. housing turnaround. This would magnify the excess liquidity process. One indicator to watch is the volume of housing traffic and sales."

But we are in a slowdown period right now, and other economists think it will last a bit longer, while dodging the recession bullet.

Chief economist David Huether at the National Association of Manufacturers (NAM) sees GDP growing by a severely anemic 1.4 percent in the first six months of this year.

A big reason: The manufacturing picture looks bleak, he said this week in a new study. "The ripple effect of the housing downturn and a slowdown in motor-vehicle production has caused a significant hit to the overall manufacturing economy.

"While these sectors shed 125,000 jobs and saw output decline by 2.4 percent last year, the remaining sectors picked up 18,000 jobs and output rose by 2.7 percent," he said.

NAM has the answer to increasing manufacturing growth that should be a major part of the stimulus package. "The best way to create jobs is to jump-start business investment with an enhanced capital-cost recovery system" that lets business quickly write off the purchase of new equipment and technology for plant expansion, says Dorothy Coleman, NAM's vice president of tax and domestic economic policy. Its chief tax proposals being strongly lobbied on Capitol Hill include a 50 percent bonus depreciation provision for new business investment.

With all its problems, the U.S. economy turned the corner into 2008 with some strong fundamentals that could help get it through this downturn faster than anyone expected: strong export sales in a still-booming global economy, tumbling interest rates, the Fed's infusion of liquidity into the financial system, strong corporate earnings, relatively low tax rates that need to be reduced further and a resilient, high-productivity economic infrastructure that has pulled us through hard times before.

These are reasons to remain optimistic about overcoming this latest economic challenge. Anyone who bets against the American economy will lose.

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