Slowdown could have been avoided

A well-respected economist says the U.S. is now in a recession...and that Congress and the Federal Reserve could have stopped it.

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By Chris Isidore, CNNMoney.com senior writer

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Lakshman Achuthan, Managing Director of the Economic Cycle Research Institute
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NEW YORK (CNNMoney.com) -- Congress and the Federal Reserve missed their chance to keep the country from falling into recession by acting too slowly, according to a well-respected economist.

Lakshman Achuthan, the managing director of the Economic Cycle Research Institute, said the economy has now fallen into what he calls "a recession of choice."

He argues that the economic stimulus package passed by Congress this year is too late to help many consumers and businesses and that the Federal Reserve was too timid when it started trimming interest rates last fall.

Since then the Fed has aggressively cut rates, most recently lowering them by three-quarters of a percentage point at its meeting Tuesday.

"If they had done all this in the fourth quarter, I think we'd be having a different discussion," he said. "We might not have had Bear," he added, referring to the fire sale purchase of brokerage firm Bear Stearns (BSC, Fortune 500) by JPMorgan Chase (JPM, Fortune 500) that the Fed helped arrange over the weekend to avoid a collapse of Bear Stearns.

The ECRI, which forecasts a number of key economic readings such as employment, inflation and production from various business sectors, had been reluctant to join the rising tide of economists arguing that the economy has fallen into a recession. But it changed its call Thursday.

Achuthan said the tipping point for his firm's recession call was when its leading index for non-financial services, a sector of the economy that accounts for 62% of jobs, turned negative.

Although Achuthan said he saw weakness in the U.S. economy last fall, he did not make a recession forecast at that time because he thought it was possible the government could have done something then to prevent a recession.

He said low business inventories at the end of last year gave policymakers a chance to avoid the recession, because any spur to spending by businesses or consumers would have resulted in a quick pick-up in production.

"There was an opportunity that was wasted by policymakers because they didn't understand those dynamics," he said. "That is one aspect of how the policymakers have goofed and why this recession is a choice, not something that happened by bad luck and chance."

He added that the more decisive action taken so far this year by Congress and the Fed has come too late to stop the economy from falling into recession.

Congress passed a $190 billion economic stimulus package, but the biggest part of that legislation - tax refunds of about $600 per taxpayer, won't be in the hands of consumers until May at the earliest.

"It was a good idea that was horribly executed," he said. "Policymakers said time was of the essence. Unfortunately, they didn't understand what that really meant. They just do not understand how the business cycle works; it is not going to wait around for stimulus some months down the road.

And while the Fed has slashed interest rates by a total of two full percentage points at meetings in January and March, its initial cuts in September, October and December last year totaled only one percentage point.

Achuthan's forecast comes on a day that some other readings show the economy possibly heading into recession.

The Conference Board's index of leading economic indicators fell 0.3% in February, and its January reading was revised lower. The latest report is the fifth straight month the indicator has fallen, the first time that has happened since 2001, the year of the last recession. A prolonged decline in this index typically signals a recession.

In addition, the latest weekly reading on initial jobless claims rose sharply, pointing to an increased likelihood that March will be the third straight month of job losses for the U.S. economy.

Issue #1 - America's Money: All this week at 12 pm ET, CNN explains how the weakening economy affects you. Full coverage.

Have you lost your job, your business or your home? Are you raiding retirement accounts to pay the bills? We want to hear from you. Tell us how you're being affected by the weakening economy and you could be profiled in an upcoming story. Send emails to realstories@cnnmoney.com. To top of page

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