SAN FRANCISCO -- Morgan Stanley economists giveth and Morgan Stanley economists taketh away.

Last Thursday, Morgan Stanley chief U.S. economist Richard Berner issued a report entitled "Recovery Arrives," in which he declared that the recession is ending and that first-quarter GDP should be positive. The economist urged caution and fretted that "market participants will assume that recovery will be more vigorous than the consensus expects." But given that Berner was among the first to predict the current recession, his headline "recovery" call lent credence to -- and likely enhanced -- the stock market's performance

last week.

Today, however, Stephen Roach, Morgan's chief economic and director of global economic analysis, issued a retort to Berner's newfound optimism. Coincidentally, or not, major averages stumbled, with the

Dow Jones Industrial Average

falling 0.6%, the

S&P 500

losing 0.7% and the

Nasdaq Composite

down 1.1%.

"With all due respect to Dick Berner, I think the big macro call lurking out there for the U.S. economy is the possibility of a double dip in 2002," Roach wrote, referring not to ice cream but to the rocky road (

couldn't resist

) he foresees the economy facing in 2002. With the exception of the 1990 downturn, every U.S. recession since 1957 has produced a pattern of a "brisk recovery" for at least one quarter followed by a relapse into negative GDP, he noted.

This pattern of the U.S. business cycle bears noting because one of the two "classic preconditions of the double dip" is already in place, Roach wrote. Specifically, inventory liquidation, which Morgan estimated occurred at the "massive rate" of $110 billion in the fourth quarter alone.

The optimistic view is that lower inventories plus an improvement in final demand creates the foundation for a robust recovery. But Roach believes there's a "compelling case for an imminent

downturn on the demand front," which is the second precondition of past double dips.

A combination of 0% financing by automakers, "unusually aggressive" price-cutting by retailers and extraordinary warm weather in November and early December created "temporary props" to demand, he declared. The argument, and Roach isn't alone in making it, is that those factors fueled purchases in the fourth quarter that otherwise would have otherwise occurred in early 2002.

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"And now, it's payback time," he wrote.

Another factor that could contribute to a downturn in consumer demand is the sharp reduction, or elimination, of year-end bonuses, which are more important to Wall Street than to Main Street, Roach conceded. But with 88% of U.S. corporations using some form of flexible compensation, according to the

Federal Reserve

, and fourth-quarter earnings expected to be 18% below year-ago results, "there is every reason to look for earnings-driven compensation awards to have been cut sharply," he wrote. "The American consumer is unprepared for the sticker shock of the downside of flexible compensation. "

Roach was traveling today and couldn't be reached, and Berner did not return a phone call seeking additional comment. The intent here is not to suggest or spark some rivalry -- friendly or otherwise -- between the two Morgan economists;

certainly embodies the notion that differing opinions from independent thinkers are beneficial to readers.

The point, quite simply, is that there is more than one side to the recovery scenario most Wall Street economists and investors are so eagerly embracing.

And Another Thing

Absent from Roach's cautionary outlook was the issue of U.S. consumers' debt burden, which fell as a percentage of disposable income to 13.81% in the third quarter from 14.22% in the second quarter, according to the Fed.

But the debt-servicing burden remained higher than in the three previous recessions, and the third-quarter downtick "is unlikely to be the start of a sustained downward trend," Paul Kasriel, chief economist at Northern Trust in Chicago, commented late last week.

Although lower mortgage rates played a role, Kasriel argued that the third-quarter decline was largely the result of a 12.1% increase in personal income, which was primarily driven by tax-rebate checks. Disposable personal income rose notably in July and August, when most Americans received their rebates, and then fell significantly in September and October, he noted.

With the one-time boost from tax rebates gone and unemployment rising, the economist forecast that personal income probably fell in the fourth quarter, though official data for December won't be released until Jan. 31. Meanwhile, the surge in auto sales in the fourth quarter meant a rise in consumers' debt, because even those who got 0% financing for their car loans still have to make payments on the principal.

"In sum, the household balance sheet debt imbalance does not yet seem to have been addressed," he wrote. "Rather, Greenspan's easy-money policy of 2001 has encouraged households to go deeper in debt."

On an annualized basis, household borrowing in the third quarter was the highest on record in the post-World War II era, Kasriel noted.

Then again, like myriad other fundamental issues, consumers' debt won't matter until it matters.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.