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Look Out Below!

Nobody wants to say the word out loud, but the warning signs have become unmistakable. After nearly a decade of high-flying prosperity, a recession seems to be looming before us. Why isn't the Fed trying to avert it? And what can you do to protect yourself?

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It starts with the little things. Fifth Avenue merchants notice the crocodile handbags aren't moving as fast as anticipated. For-sale signs begin sprouting up on Chappaqua's lawns in unusual numbers. And all those head-hunters -- did they just stop bothering me, or are they not calling anyone anymore?

Those are the first signs. Not massive layoffs or sob stories about bankruptcies and pensions stretched too thin. This downturn is sneaking up on little cubs' feet, not stampeding in like the bulls at Pamplona.

In fact, measured by the most visible economic thermometer -- the nationwide-employment index -- the country and the region still remain healthy, even a bit feverish. But by every other gauge, things are falling apart. Rapidly. That 4 percent employment number is not giving an accurate read on the mood of American business. It mocks the underlying weaknesses and, ironically, is creating the kind of false confidence that ensures that we slip into a recession as early as the second quarter of 2001 if the Federal Reserve doesn't do something to stop it.

You wouldn't know it from listening to the two guys whose dimpled chads are being recounted down in Florida. During the presidential campaign, both candidates sought to identify themselves with the continual prosperity -- now just a hangover from a previous century. The irony, of course, is that while they were beating the hustings and talking about how to spend our newfound bounty, it was disappearing beneath their feet. The protracted postelection recount only prolonged the uncertainty, leading to a more fearful consumer and a harder economic landing.

The economic folk in the Clinton administration understandably seem prouder of what they see in the rearview mirror -- deficit reduction galore -- than what lies ahead. But from my trading turret, where I have to watch the price of the U.S.'s real merchandise change every day, and from my phone, where I listen to the pleas of hundreds of companies a week in conference calls about the state of their (faltering) businesses, I know what's happening. I've seen this pattern before, mostly in 1990, when no one expected a slowdown. No one. But we got a whopper anyway.

The last straw will come this holiday season.

If it's that obvious to me, why haven't you noticed the decline yet? First, business was so robust coming into 2000 that you can't expect a total about-face overnight.

Second, the instrument of the decline, the six rapid rate increases by the Federal Reserve over the past year and a half, was administered more to slow down the stock market, not to cripple the whole economy. Fewer increases would probably have done the job, and the economy would have had what we call a soft landing, but now a hard landing is in the cards because the Fed became obsessed with the rising nasdaq and feared that it was about to produce a Japanese-style meltdown. (That's when everybody borrows money to buy stocks, and then the market crashes, destroying purchasing power for a decade and producing a permanent recession.)

The Fed just wanted to clobber the animal spirits in the stock market. By making money more expensive to borrow, it increased the risk for those who were buying high-flying stocks while margined to the eyeballs. Chairman Greenspan had to know that one of the unintended consequences of braking the stock market would be the breaking of the real economy, the economy that needs easier credit to stimulate consumer demand for goods big and small, cars, homes, and everything that goes in them. He knew that higher rates pause the real economy, not just margined stock jocks. But he couldn't stop himself. He was haunted by visions of the wrong turn made in Japan when its real economy got crushed by stock-market speculation, when yen that should have gone for production or purchasing got channeled into a too-vibrant stock market. The result? A vaporized stock market and a vaporized consumer. Greenspan couldn't let that happen here. Not on his watch.

Finally, New Yorkers are less likely to see the slowdown coming because the bonuses in New York were so bountiful last year that funds are still buoying the real-estate and vacation-home economy. But wait two months. The real-estate boom will be a thing of the past and so will all the other high prices it brought with it.

You might not want to join the bidding war for that $900,000 house in Jersey they sold for $400,000 six years ago, the last time things got tough in the securities business. I can't imagine that those Madison Avenue retail leases cut earlier this year will seem so smart a few months hence. And you may not have to call so far ahead for those hard-to-get restaurant tables. In fact, I would suspect that the busy spot market in Nobu restaurant reservations my former assistant once maintained may dry up entirely!

Where is the weakness concentrating? In consumer spending, that's where, which represents two thirds of our gross domestic product. Retail, as represented by Home Depot, Wal-Mart, BestBuy, Gap, May, and Federated -- pretty much every major player there is -- has turned radically soft. Every one of these companies has signaled a slowdown. That's an unprecedented across-the-board cry for help.

Alone, those companies couldn't knock the economy over. But the car companies are also crying uncle. Ford, with its crushing P.R. problems from the Explorer debacle, can't be expected to report good numbers. But it is the stunning tail-offs at General Motors and DaimlerChrysler, both of which would have been expected to take some market share from Ford, that have me more worried. GM's lots are piling up with cars and Chrysler is bordering on double-digit declines in sales. That's staggering. Particularly disturbing is the stagnation in light trucks. That's been the cash cow of this group through thick and thin, and supply has finally caught up with demand. And then some.

The automakers are all in hope mode, betting that sales will come back. But all that does is put more unsold cars on the lots, forcing lower prices and lower profits than expected. I suspect that sometime, hopefully after Christmas, they will come to their senses and address the markets in their own time-honored way: with massive layoffs. Just two weeks ago, we saw our first auto-plant idlings in ages, and our first are never our last. Maybe then it will become obvious to others, especially the Fed, that the economic landing will be the kind that comes when the landing gear gets stuck in the up position.


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