Knight Ridder Newspapers

WASHINGTON – Economic forecasters and Wall Street analysts are quietly hedging their bets after months of rosy reports about a vibrant U.S. economic outlook. They’re now mentioning the growing possibility of recession ahead.

Why? Soaring gasoline prices, nightmarish home-heating costs this winter, plunging consumer confidence, rising interest rates and falling new-home sales.

Similar energy-price spikes, rising interest rates and housing slowdowns played important roles in past recessions. While most forecasters caution that recession remains unlikely, they nevertheless are dusting off the R-word, which almost all of them brushed aside before hurricanes Katrina and Rita.

“People are starting to hedge bets. Obviously it’s an uncertain time,” said Jay Bryson, global economist for Wachovia, the big bank based in Charlotte, N.C.

Ed Yardeni, a veteran Wall Street seer who’s now with Oak Associates Ltd., rose to prominence in years past largely on bullish forecasts, but since Rita hit, he sounds decidedly bearish.

“The U.S. economy has been remarkably resilient in recent years, but consumers may start to postpone discretionary spending to build some cushion to pay their higher heating bills on top of paying more to fill up their gasoline tanks,” he wrote to investors this week. “In other words, I am not sure that the economy is resilient enough to withstand the one-two punches from the Katrina/Rita tag team.”

Yardeni said it was “increasingly likely” that the U.S. economy soon could face a six-month bout of stagflation – in which prices rise but wages and hiring stagnate – the economic curse of the 1970s.

Much gloomier is Philip Verleger, a veteran energy analyst at the Institute for International Economics, a nonpartisan research center. He predicted today’s energy crunch more than three years ago, and now sees an economy saddled with dangerous parallels to President Lyndon B. Johnson’s in the mid-1960s.

LBJ launched his ambitious Great Society domestic-spending program while fighting a costly war in Vietnam. The economy couldn’t underwrite it all, leading to tax hikes, price spikes and a 15-year battle to control inflation. Today’s parallel is costly wars in Iraq and Afghanistan, the rebuilding of the Gulf Coast and soaring federal deficits.

“This is the setup for 1966, 1967, 1968,” Verleger said, pointing to pledges by the president and lawmakers to spend whatever it costs to rebuild the Gulf Coast. “If Congress goes ahead and spends another $200 billion and doesn’t pay for it, it’s just what LBJ did.”

Economist Nigel Gault, with Global Insight Inc., in Boston, expects a slowdown, but only a short one – probably.

“The reason it (recession) gets mentioned … (energy price) movements of this sort of magnitude usually would be associated with recession. So you do have to start asking the question,” Gault said. “The question needs to be asked, even if we think things are different on this occasion.”

There also are some reasons for optimism, however.

Rebuilding after the hurricanes will spur spending and growth. America remains the global investment zone of choice, as Europe and Japan remain sluggish. Long-range interest rates so far have refused to follow the Fed’s effort to head off inflation by raising short-term rates 11 straight times, and those low long rates so far are sustaining investment.

Ben Bernanke, the head of President Bush’s Council of Economic Advisers, argued in a speech Tuesday that the U.S. economy remains resilient.

“It recovered vigorously from the severe shocks it experienced between 2000 and 2003, and I believe that it will sustain growth in the face of the new challenges brought by the two hurricanes and high energy prices,” he said.

The Commerce Department reported Wednesday that orders of durable goods – big-ticket items built to last more than three years – grew by 3.3 percent in August.

Wachovia’s Bryson puts the chance of outright recession, defined as two successive quarters of negative growth, at only 25 to 30 percent, but offered this caution: “I would agree that the risk of recession is greater today than it was a month ago. I can certainly think of how we can get to recession.”

Consumer behavior -which drives about two-thirds of U.S. economic activity – is the key. On Tuesday, consumer confidence posted its biggest plunge in 15 years, according to a survey by the Conference Board, a New York-based business-research center.

Executives at Wal-Mart, the country’s biggest retailer, are warning of weaker sales ahead as high gasoline and home-heating prices eat their customers’ cash.

This week, the government reported that housing starts fell in August, and July starts were revised downward. Stephen Roach, the chief economist for Morgan Stanley, the giant investment bank in New York, warns that America is a “shoestring economy,” kept afloat only by reckless borrowing by consumers and the government alike. He thinks a slowdown in home sales will expose how much economic growth has been fueled by risky borrowing against home equity.

Federal Reserve Chairman Alan Greenspan tried again Tuesday to slow the housing boom before it bursts with sharp price drops. He warned that overconfident lenders have made too many risky home loans.

“History cautions that extended periods of low concern about credit risk have invariably been followed by reversal, with an attendant fall in the prices of risky assets,” Greenspan said.

Many homeowners are betting that their homes will appreciate enough to offset their growing personal debt. Should the economy slow down and home sales drop sharply, these homeowners and their mortgage lenders face financial ruin.