The robust employment report on Friday again has investors worried that the nation's economy is too hot, but at least one Wall Street economist thinks the temperature could soon drop.
"By the end of this year we may well be in a recession with the Federal Reserve easing credit conditions," said David B. Bostian Jr., chief economist at Herzog, Heine, Geduld Inc., New York.
That seemed rather hard to picture at week's end. Job growth in March was actually less than anticipated, at 175,000, but wages advanced while the nation's unemployment rate dropped to 5.2%, according to the Labor Department's latest surveys.
As a result, interest rates rose in the bond market and stocks gyrated as traders and money managers grew more anxious about another possible anti-inflationary rate increase by the Federal Reserve.
But Mr. Bostian said he thinks the 1994-95 economic "soft landing" engineered by the Fed-cooling the economy without triggering a recession-is unlikely to be repeated.
"It worked beautifully then, but things are quite different now if you look underneath the economic statistics," said the economist, who is among the few on Wall Street predicting a downturn.
As he sees it, "the binge in demand that the Fed is concerned about is the result of delayed 'wealth effect' from the bull market in stocks and a tremendous surge by the middle to lower consumer sector."
The twin phenomena cannot last and are indeed well beyond their peak, Mr. Bostian asserted. As a result, the Fed is, in effect, "trying to preempt a rocket that is about to burn out anyway."
The economist said another rate hike by the central bank is still possible but added: "Chances are 60%-40% that the first one was the last one."
Mr. Bostian has been predicting a "mild recession" in 1997 since last year, and he said he believes the recent Fed tightening probably amounts to the "extra push" that will ensure a slump happens.
In fact, he said, the Fed move in March "will ultimately be seen as a policy mistake. The Fed is going to end up being blamed for a downturn that would have happened anyway."
Mr. Bostian said he views the economy as being in fragile shape because of high consumer debt levels and the huge run-up in stock prices during the past two years. And he noted that corporate revenues are under pressure, with some turning flat. Layoffs and retrenchment typically follow, he said.
When will the recession become evident? "It could happen by late summer or early autumn, but we will all be talking about it by the end of the year," Mr. Bostian said.
"I rethink my position every day, but that is still the way I see things," he said in a recent interview. Elsewhere around Wall Street, he sees "an incredible degree of complacency" among those who "have bought the 'perpetual prosperity' line."
The economist cited the recent steep selloff in the Nasdaq market as an important signal that business conditions are changing.
The Nasdaq market is the investment center for shares of many small and high-growth companies, particularly in the technology sector. Nasdaq's composite index peaked in January and has since lost six months' worth of gains.
"The Nasdaq composite predicted both the 1987 market crash and the 1990- 91 recession," Mr. Bostian noted. Much as it has done this year, the index fell then even as the much more widely watched Dow Jones industrial average was hitting new highs.
