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WASHINGTON, May 07, 2008 (Thomson Financial via COMTEX) -- Alan Greenspan says the US economy is in a "pale recession." George W. Bush refuses, as presidents do, even to use the word, calling it a "tough economic period" for Americans. This time, based just on how financial markets have been acting recently, it could be that the politician, not the economist, might turn out to be right. Or not.

"There has been a sea-change in investor sentiment since the Fed back-stopped the Bear Stearns buyout in mid-March," says Sal Guatieri of BMO Capital Markets.

He put together a long list of optimistic-looking turnarounds: "Stocks are up 11 pct from their lows, Treasuries have sold off, the greenback has stopped falling, and gold has lost its glitter."

You could add to that banks raising large amounts of new capital and evidence that the Fed's new lending facilities have allayed fears of a liquidity squeeze.

"So," asks Robert Brusca of FAO Economics, "What if it's not a recession?" It's a slowdown, he says, but one that could yet become a recession.

While the US economy has suffered monthly job loss numbers that on the surface certainly look recessionary -- 260,000 since the beginning of the year -- the downward trend of jobs looks less doom-laden.

Plotting the each month's losses vs the change five months earlier, Brusca says the "change in pace or deceleration from five months ago is not as severe as it was in past slowdowns that failed to become recessions."

The numerical pace of current job losses is worse than in some slowdowns, but the deceleration is less severe, Brusca concludes. However slowly it's moving, the US economy is not metaphorically hitting a concrete wall at 60 mph, more like 30 mph, and "arguably, at slower speeds, it is easier to recoup."

With its huge collective sigh of relief, Wall Street sentiment has arguably been outrunning the signs of economic progress, though that would hardly be unprecedented. The US economy may have skirted disaster but it is not out of danger.

Despite the "recent run of mild upward data surprises suggesting that the economy has thus far only suffered a mild recession," Richard Iley of BNP Paribas says the Fed's latest survey of bank lending "illustrated that the risks of the downturn significantly intensifying remain acute."

What the Fed most fears, stated repeatedly in various officials' speeches, is the "adverse feedback loop," in which falling house prices hurt bank balance sheets, resulting in restricted credit to cash-strapped consumers and businesses, who are forced to cut back their spending, further intensifying the deflationary pressure.

Along with the pleasant surprises, the latest data have also showed higher foreclosure and vacancy rates and faster-falling home prices.

The Fed's Senior Loan Officer Survey reported across-the-board credit tightening and falling loan demand. Add to that 20-year lows in consumer confidence and Iley says "it is therefore hard to see that the downside risks facing the economy can realistically be judged to have retreated to any genuine degree over the last few weeks."

Just last night, Federal Reserve Chairman Ben Bernanke said "conditions in mortgage markets remain difficult," and he warned that "more-rapid declines in house prices may have an adverse impact on the broader economy" as well as on financial markets.

Looking at that, Merrill Lynch's David Rosenberg says "The futures market thinking that the next step by the Fed is a tightening seems to be out of step with Ben Bernanke's current thinking. This is akin to Alan Greenspan's 'headwinds' speech circa October 1991 -- and the Fed had another 1.50 percentage points left in that easing cycle." dennis.moore@thomsonreuters.com dem/wash/rw

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