The Wall Street Journal-20080131-CAPITAL- Tone Is Calmer Off Wall Street

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CAPITAL: Tone Is Calmer Off Wall Street

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Talk to folks on Wall Street, and you sense panic. This could be the Big One, a deep recession of the sort last seen when then-Federal Reserve Chairman Paul Volcker was raising interest rates to break the back of inflation 25 years ago.

Yet wander away from the nation's money center, and the tone is different. Optimism is scarce, for sure. Ordinary workers and voters, many of whose paychecks haven't been keeping up with inflation, are bummed and anxious. But the tone of conversation among many executives in Main Street businesses (outside of housing) is worried, not gloomy -- and certainly not panicked.

"The further you get from Wall Street, the better things look," says economist Mark Vitner, who works at the Charlotte, N.C., headquarters of Wachovia Corp. His bank sees a painfully slow -- but recession-free -- economy, growing at a 1% annual pace for the first half, followed by a surge of 2.5% or better growth in the second half as the oomph from fiscal stimulus and recent Fed interest-rate cuts is felt.

The other day, analysts asked Greg Hayes, United Technologies Corp.'s vice president for finance, if the big manufacturer has seen any deterioration in the aerospace, building and other markets to which it sells. "We really have not," he replied, according to a Thomson Financial transcript of the call. "And believe me, we're asking that question every week . . . as we read the headlines. I think everyone is concerned that there is a slowdown out there. We have not seen it."

At Verizon Communications Inc., President Denny Strigl struck a similar note, professing to "remain very confident about 2008 despite all of the noise we are hearing about the economy.

What gives? Are Fed Chairman Ben Bernanke, the White House and Congress overreacting?

It is worse on Wall Street. Losses are massive, risk-management models have been shredded and chief executives have been replaced. "This a credit-market shock, and Wall Street is in the eye of the storm," says Laurence Meyer, a forecaster and former Fed governor who is more optimistic than many others. "It's what makes this different."

It is easier to be upbeat if one is the CEO of a company that does a big chunk of its business overseas. United Technologies got 62% of its revenue from abroad last year. Similarly at Caterpillar Inc., Chief Executive Jim Owens is chipper about the equipment maker's outlook because he is counting on continued strength abroad to offset the recession the company anticipates in the U.S. More than 55% of Caterpillar's sales come from outside North America. It expects world- wide revenue to grow 5% to 10% this year even though U.S. revenue will be somewhere between flat and up 5%.

And less-pessimistic forecasters and executives are impressed by the speed with which the government is flexing its recession-resisting muscles. President Bush and the leaders of Congress are moving surprisingly swiftly on fiscal stimulus, and the Fed is now cutting rates aggressively. With yesterday's move, it has lowered rates by 2.25 percentage points since August.

Says Richard Berner of Morgan Stanley: "The combination of aggressive monetary and fiscal stimulus makes us more confident in our call for a mild recession." By this fall, he says, the economy may be growing at a comfortable 3% pace or better.

Number-crunching forecasters argue, correctly, that new-home construction, the major drag on economic growth, can't keep declining indefinitely. To reduce growth in gross domestic product as much as it did in 2007, housing starts -- down 38% in the past year -- would need to fall another 24% this year, says Wells Capital Management's James Paulsen. "Not likely in our book," he says.

Let's hope so. But Wall Street might yet prove to be right. Maybe the tidal wave hasn't reached Main Street yet, but that doesn't mean it won't.

The central issue is how much worse the credit crunch will get. "It has spread much further than anybody expected," Mr. Meyer says, and its eventual impact on consumers and businesses is hard for a model- tending forecaster to quantify. Hence all the talk about downside risk. As Mr. Meyer puts it, "The 'downside risk' is calibrating all those things we cannot measure."

Or, as another economist once put it: "Extreme disruptions of the normal functioning of financial markets seem often to have a significant impact on the real economy." That would be Ben Bernanke.

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