Anxious Americans feel the good times are slipping away

A manicurist in Cleveland, Ohio is concerned. Her average client spends between $12 (€13.50) and $50 each week. But last month two clients disappeared, leaving the woman, who calls herself an "economic indicator", wondering how long people will continue to spend on things they do not absolutely need.

A general contractor in New York City is installing kitchen cabinets for wealthy clients on the Upper East Side, but is worrying about next year. The cover of New York magazine several weeks ago trumpeted the question: "Recession?"

"I don't need this now," says the contractor. "I remember the last recession and I don't need to go through that again."

In California, economists at the University of California at Los Angeles forecast a mild recession in mid-2001, but voiced ironic optimism that it would affect the region less dramatically than elsewhere because unemployment in the aerospace and defence industries has already taken a severe toll in the area.

Elsewhere, the business sections of various newspapers across the US have begun weekly instalments of "Dot.Com Deathwatch" sections, chronicling the demise of the venture-capital fuelled high-tech firms that have been such a publicised and crucial part of the new economy.

All in all, the word that dare not speak its name during a nine-and-a-half year historic US economic expansion has begun to whisper more explicity.

"Recession" is on everyone's lips. And while the majority of US economists are not in a consensus on the likelihood of a recession in 2001 - the predictions range from a 30 per cent chance of recession among the bulls to a 60 per cent chance among the pessimists - there is a growing concern that the long-predicted "soft landing" for the US economy may be a bit harder than anyone expected. Moreover, there is agreement that even a soft landing will feel hard, and will hit Americans harder, because of the contrast with the good times, which began to seem normal and permanent in the 1990s.

Firstly, the indicators of an economic slowdown are everywhere, but perhaps nowhere more pronounced than in corporate earnings pre-announcements and revisions. So far this quarter, an unprecedented 243 companies have pre-announced their earnings, warning of factors that might affect stock price.

Companies such as WorldCom, Sprint and Aletra are among those 59 per cent that have issued negative preannouncements. Chip-maker Intel has said that weak demand for computers would mean flat or lower revenues in the fourth quarter.

Moreover, analysts continue to slash their earnings estimates. On October 1st, the FirstCall Corp forecast 19.1 per cent earnings estimates for the Standard & Poor's 500 in 2001. By November 14th, the predictions had been slashed to 12.6 per cent, and sources say even that figure is optimistic and is likely to plunge.

There is more. Housing construction has dropped some 4 per cent from 1999 levels. Manufacturing has slowed. Just last week, Detroit auto giant General Motors said it would build 1.3 million cars in the first quarter of 2001, down 14 percent from its 2000 level.

What is strange about all this is that, historically, the US economy is doing fine. The country's top 50 economists told Fortune magazine they expect the economy to grow 3.5 per cent in 2001, and inflation to run at about 2.5 per cent.

While those growth rates are considerably lower than in the past few years, they remain historically impressive. And those numbers are similar to the rest of the world: the IMF, in its latest World Economic Report, predicts EU growth in 2001 at 3.3 per cent.

But if it was irrational exuberance that helped fuel the US's economic expansion - some simply call it confidence - the opposite emotion may have a similar effect. Some 54 per cent of Americans said a recession was very likely in a poll last week for Newsweek. The fact that the Nasdaq has shed one-third of its value since March, and the Dow Jones Industrial Average is down some 7 per cent, has hit people hard, even if those losses are only on paper or in retirement funds.

"We've gone from being too exuberant to being too pessimistic," Chase Manhattan Bank chief economist Mr John Lipsky told Fortune magazine.

The clearest signs of pessimism are just beginning to show up in Christmas retail sales. Americans have been spending money since 1992 as though the good times were here forever. Back then, they saved 9 per cent of their after-tax income. This year, that figure was down to zero.

But change is afoot. Holidays sales are down 7 per cent from the same period last year. People are holding off on new cars and expensive jumpers. They are buying paperbacks instead of hardcover books. Reservations at formerly exclusive and expensive restaurants in Manhattan and San Francisco are easy to come by.

Despite the pain, most agree that the slowdown is exactly what Federal Reserve chairman Mr Alan Greenspan had in mind when he left interest rates unchanged last month. His anti-inflation inclination seems intact, and observers are divided about whether the Federal Reserve will trim rates in the first quarter if the landing seems too harsh. Already, Mr Greenspan has made comments aimed at encouraging banks not to overreact by tightening credit too much.

What does seem certain is that, between the stock market pullback, consumer pessimism, lower profits and political uncertainty, the curtain has been raised on a delicate economic balancing act that will unfold in the next few months.