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­ By Alen Mattich Of DOW JONES NEWSWIRES LONDON (Dow Jones)--The lesson of the 2001 recession in the U.S. is that economists not only are notoriously bad at predicting recessions, they often don't realize when they're right in the middle of one. Which is a jolly good reason to look for other early warning signs. A downward sloping yield curve is one. General press talk of recession might be another one. Unfortunately, both raise alarms about the state of the U.S. economy right now. Earlier this year the Treasury bond yield curve sloped down sharply. Academic work has shown a downward sloping yield curve to be the best predictor of recession around, giving about three quarters' advance notice. Which places the U.S. into recession in the last quarter of this year. A coincident indicator is the amount of recession talk, especially in the press. A Factiva search of the Wall Street Journal, Financial Times, Washington Post, New York Times and Los Angeles Times shows that the number of articles in which the word "recession" appeared doubled in December 2000 from the previous month. Economists like Harvard's Greg Mankiw now estimate that the recession of 2001 actually started in late 2000. Which is a worry. Because the number of articles in which the word "recession" showed up last month was more than double the August tally. But economists aren't buying the story just yet. They're still pretty sanguine about the U.S.'s outlook for this year. The IMF's latest projections for U.S. economic growth is 2.0%, which is at the low end of market consensus. If anything, the Federal Reserve's big rate cut last month offers justification for edging up forecasts for next year. Even those (mainstream ones) with a bearish bent figure the odds are at worst around 50% the economy slides into one. Former Fed chairman Alan Greenspan puts the odds at between a third and a half. There's a reason for this caution. Tim Duy, an academic Fed watcher at the University of Oregon, sums up the case in a recent entry on the Economist's View blog. He fears "the Fed is overestimating the downside risk to the economy." He argues, too much of the data is not consistent with recession: "Why are initial unemployment claims flat? Why does the consumer appear to hae momentum in the (third quarter)? Why are readings on manufacturing activity not solidly on the decline? Why did the inventory to sales ratio slide back to its lows? Why does the Baltic Dry Index continue to reach new highs? Why isn't faltering demand undercutting support for oil prices?" Which leaves investors with the question: Who are you going to believe? The economists. Or your lying eyes. -By Alen Mattich, Dow Jones Newswires; 44-20-7842-9286; alen.mattich@dowjones.com Alen Mattich is a senior reporter and has been writing a column on market strategy for five years. He studied economics on both sides of the Atlantic in the days before the supply-demand curve had been discovered. TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkBackEurope@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments. (END) Dow Jones Newswires October 01, 2007 07:09 ET (11:09 GMT)