This time around, hold the exuberance

The economy: The recession suddenly has been declared dead -- but is it?

March 24, 2002

NOW, THAT WASN'T so bad, was it? Unless of course you've been downsized to a lower tax bracket or lost your job or your life savings.

In an amazingly quick turnaround over the last few weeks, our high priests of money have been declaring the national recession licked. Some now are even saying our recent financial pains weren't sufficiently prolonged to formally qualify as a recession.

In anticipation, the stock market late last month went on a nice little tear -- on top of big gains since its September bottom. And on Wall Street, greed once again may be gaining the upper hand on fear.

But hold on, take a deep breath and consider that a healthy dose of caution may be in order. It has not been uncommon for downturns to take a double dip, with bad times briefly interrupted by respites of optimism. At the very least these days, there are still plenty of unrosy economic signals.

Granted, the hopeful buzz is grounded in a slew of measures that have turned positive with startling rapidity. Consumer spending, inventory investment, worker productivity, growth forecasts -- all are up. Unemployment is down, and inflation -- so far -- remains very low. In taking a neutral stance and leaving interest rates unchanged at a key policy meeting last week, the Federal Reserve noted "the economy ... is expanding at a significant pace."

But it turns out that if we're out of the woods, we bought and borrowed our way out.

We leaped at those zero-interest auto loans. We kept on buying houses, and we took the proceeds from a burst of mortgage refinancing to buy more stuff to put in our houses. (When the final numbers are tallied, Wal-Mart is expected to have become last year the world's largest company in terms of revenue. How fitting.)

And just like the federal government turning to deficit spending, many of us managed this feat by saving even less and increasing our household debt -- which already exceeded our annual disposable incomes.

It's telling that those on the front lines of business still tilt to the skeptical side. Weak profits linger. Businesses still are holding back spending. A recent survey of top corporate leaders indicates most still expect slow growth. Whom would you bank on, economists or businessmen?

At its meeting last week, Fed officials took the middle course. After 11 cuts last year that hammered interest rates to a 40-year low, the Fed signaled neutrality -- which analysts and the bond market immediately viewed as the first step toward raising rates later this year.

In citing the sudden upswing in certain indicators, the Fed reported real uncertainty as to whether sustainable growth is at hand. In the last few weeks, with the stock market in a tug of war, investors at least temporarily seem to agree.

But following their post-Sept. 11 lows, major U.S. market indexes are up by 25 percent or more, already putting them well into bull territory.

An eager lilt has returned to the voices of those incessant talking heads on cable TV business channels. "You can still get rich (even in tech)," advises the cover of a recent issue of Forbes magazine, which also happily ranks the world's billionaires. (The Waltons, Wal-Mart's founding family, comprise half the top 10.)

Investors, who already may have missed this party, fear jumping in late. This is only natural: In the '90s, many more of us became investors, coming to believe the only way we'd be able to put our kids through college or retire securely was to rely on the market's supposedly inevitable ascent.

In the last year or so, we also should have learned that it's probably best to invest in companies that actually have products and make some money and that perhaps those highly paid stock analysts and accountants may not have our best interests at heart. Have we learned anything else?

Happier days, indeed, may be here again. But it wouldn't take all that much -- a continuation of the recent rise in energy prices and stepped-up inflation -- to stall this developing turnaround or even drive it back down into what would look like another recession. Stocks remain overvalued by traditional measures; the fallout from the Enron-Andersen saga continues; our debt payments as a share of our incomes are at a historic high.

So, this time around, let's try to remember one more lesson: Hold the exuberance.

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