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Financial outlook remains gloomy

The U.S. economy is at a turning point. It just isn't clear which way it's turning.

One scenario has the second quarter as the worst of the year _ how bad we'll learn when the government releases figures next week _ and getting better from here. Call this the "Alan Greenspan really is a hero" scenario.

In the alternative, the worst is yet to come, and the economy is in the opening act of a recession. Call this the "presidents named Bush really are economically unlucky" scenario. George I and George II must commiserate about how that lucky scoundrel Bill Clinton managed to bookend his presidency with two Bush recessions.

Economic forecasting can be complex or simple. Complex isn't always more accurate. Let's go simple. Boil the economy down to three factors: the spending consumers do; the investing businesses do in machinery, buildings, computers and software; and the vitality of the rest of the world.

Consumer spending has held up surprisingly well, given layoffs, weak stock prices, surging (until recently) energy prices and post-New Economy depression. Americans are still buying a lot of new cars. Rising home prices offset the depressing effect of the sinking stocks. The typical house sold for about 6 percent more this spring than last; stocks, measured by the Standard & Poor's 500 index, fell 12 percent.

But, as Greenspan suggested Wednesday, American consumers may not continue to be saviors of the global economy. The jobless rate is likely to keep rising even if the economy perks up; that will pinch laid-off consumers and depress the rest. "You can't expect that corporate America can lay off people for a whole lot longer without having a more meaningful impact on the consumer market," says Arne Sorenson, chief financial officer at Marriott Corp., the hotel chain.

Raises, productivity bonuses and stock options won't boost income this year, and consumers may not keep borrowing to spend. Already, they spend 14 percent of each paycheck on debt and interest today, more than at any time in the past 20 years.

All this makes President Bush's accidental Keynesianism particularly well-timed. A tax cut planned when the economy was exceptionally strong arrives when it's disturbingly weak.

Nonetheless, put the odds that consumer spending will falter at 60 percent.

Business could pick up the slack. It probably won't. Spending on equipment and software is down for the first time since the 1990 recession. Industry is operating at 77 percent of capacity, the lowest since 1983, so there's little reason to buy new gear. Profits are down, so financing new investment is tough. And there are few signs that business executives believe the forecasters who predict a healthy upturn later this year. That's a problem: Capital spending is driven largely by executives' gut feel about the outlook.

Even manufacturers who think the worst is past are reluctant to increase capital budgets. At Masco Corp., a $7-billion-a-year maker of faucets, cabinets and other building products, CEO Richard Manoogian says business has been getting better steadily since April. "But bottoming out is a lot different than getting better," he adds. The Taylor, Mich., company cut capital spending this year 30 percent, and, despite the signs of life, isn't planning any increase for 2002.

Consumers account for two-thirds of the United States economy, and business investment just 15 percent. But the ups and downs in investment spending are much sharper and can drive the economy into recession or away from one. When CEOs all get cautious at the same time, the economy suffers.

Put the odds that the investment drought lasts six to nine months longer at 85 percent.

This would be a great moment for Japan or Europe or the emerging economies formerly known as tigers to come roaring back.

But U.S. export markets are going from mediocre to worrisome. Japan is still in an economic stupor. Europe no longer boasts so confidently that it will grow faster than the United States this year. Greenspan's counterparts in Toyko and Frankfurt aren't moving as quickly as he is to spur growth.

Now comes Argentina. It's easy to dismiss as a one-of-a-kind case that won't spread; just as easy to liken it to Thailand, whose 1997 devaluation triggered a global financial crisis. No one can know if the Argentine disease is contagious. But it's not a great time to test the global economy. And just because the United States dodged a bullet in the late 1990s doesn't mean it's now an economic Superman that repels bullets effortlessly.

The odds of worldwide financial crisis remain fortunately slim. But put the odds that the rest of world gets worse before it gets better at 75 percent.

Most economic forecasters don't foresee recession this year or next. They're occasionally right. If they're to be right this time, consumers, businesses and the rest of the world must cooperate.