News Column

A Mixed Forecast for 2002

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Experts weigh in on when the economic recovery will begin.

By Scott Williams
January/February 2002

With the U.S. recession approaching its one-year anniversary in March, CEOs and consumers are eager for it to end. A consensus of forecasters points to a recovery in the early months of 2002, although experts use different data to back up their projections (see table). “Enough stimulus has been pumped into this economy that …I would expect that, coming into the first quarter, companies will be reporting positive numbers,” says George Rodriguez, senior vice-president for Hispanic-owned brokerage Guzman & Co. According to the Blue Chip Economic Indicators, a survey of 53 leading forecasters, almost 70 percent of the prognosticators believe the recession will end by April 2002. The bullish outlook of Mr. Rodriguez hinges on the effect of the 11 interest rate cuts engineered by the Federal Reserve Board last year. The first came on January 3, 2001, when the Fed cut the federal funds rate from 6.5 percent to 6 percent; the most recent cut occurred on December 11, when the rate dropped from 2 percent to only 1.75 percent. “I think that with interest rates the way they are, the stage is set for recovery,” seconds Sam Ramirez, senior vice-president at Ramirez & Co., the oldest Hispanic-owned investment bank in the nation. But he calls the situation in the Middle East “the X-factor that’s hard to gauge,” and notes that any talk of a recovery presumes no new crises. “I’m hoping things on the political side will calm down and we won’t have any more events to decrease productivity and É hinder production in business in general,” he says. Because manufacturing led the country into the downturn, it could foreshadow a recovery. Once production starts to rise and companies report positive numbers, the turnaround likely will start in earnest, Mr. Rodriguez says, although it won’t affect the entire economy simultaneously. Six to nine months could pass before the $10 trillion U.S. economy begins a sustained, across-the-board recovery. Ken Goldstein, economist for the Conference Board, a nonprofit research group in New York, believes this recession differs from previous ones because of its origin in manufacturing rather than a fall-off in consumer consumption. Manufacturing investment dropped six to eight months before consumption did, while at the same time exports slowed. After double-digit growth in 1999 and 2000, nonresidential fixed business investment, a measure of manufacturing investment, declined 14.6 percent in the second quarter of 2001. As for predicting when the recession will end, Mr. Goldstein looks at employment data. He says it could take as long as 18 months before the economy resembles that of 1998 or 1999. He forecasts that employment -- a key measurement in his view -- may not rebound until late 2002 or early 2003. His colleague at the Conference Board, Research Director Lynn Franco, says “a rebound by mid-2002 is likely.” “We have to get through this period of falling consumer confidence and rising unemployment,” Mr. Goldstein says. “And [we] have to get businesses making money again and see the global economy rise [in growth rate] from 1.5 percent to 2 percent, which is possible by the end of this year.” Economists with the University of California at Los Angeles’ Anderson Forecast peg the end of the recession at “mid-2002.” Forecast Director Edward Leamer believes the economy will turn the corner when three imbalances are corrected: overinvestment in technology by businesses, overspending by consumers, and over-reliance on U.S. investments by portfolio managers. “We are in recession today because of rapid adjustment to the first imbalance,” Mr. Leamer says. “The bottom line: Expect a recovery by mid-year 2002, but a recovery with a relatively modest GDP growth.” Like Mr. Goldstein, Mr. Leamer expects unemployment to continue to rise during 2002. Among professional investors, many maintain that bond and equity market performance gives a quicker read on the country’s short-term future than economic data, which usually takes months to compile. Alberto Paracchini, head of investment for Banco Popular North America, focuses on the fact that although the Fed has cut short-term interest rates, longer-term rates such as those on two-year, five-year, and 10-year bonds have not followed in tandem. That means investors and traders “have an expectation that there’s going to be higher growth at some point in the future and marginally higher inflation,” says Mr. Paracchini, who expects a turnaround by the second or third quarter. “Typically, one would look to the credit market first, which is the bond market, and then to the stock market,” explains Mr. Rodriguez at Guzman & Co. “The credit market will start to be bullish on a sector or a company or just the economy, and the trades in the bond market [will] then filter toward the equity market. É Next year, barring some unforeseen event overseas or [something like] September 11, I think the stock market will be a good place for long-term investors to put their money.” Several major brokerage firms confirm that bullish outlook. Dick Rippe, chief economist at Prudential Securities in New York, foresees a turnaround in the first quarter. In a study titled “2002: The Year Ahead,” Merrill Lynch Chief Economist Bruce Steinberg expects the recession to linger for winter and recover by spring, but he calculates that total U.S. GDP will grow less than 1 percent this year. “If we are not out of [the recession] yet, we should be soon,” says Joel Naroff, CEO of Naroff Economic Advisors. He bases his optimistic outlook on stock market yield curves. In 2000, the average yield curve became inverted, the sign of an impending slowdown. During 2001, the curve returned to normal, indicating a recovery, and it steepened as the year progressed, indicating strong growth, according to Mr. Naroff. But even the bullish Mr. Naroff thinks labor markets will remain weak until later in the year, a trend of particular concern to Hispanics. Between August and December 2001, total U.S. unemployment rose from 4.9 percent to 5.8 percent. During the same period, Hispanic unemployment rose nearly twice as much, from 6.4 percent to 7.9 percent (see graph), according to the Bureau of Labor Statistics. “The job market is a lagging indicator,” Mr. Naroff explains, because businesses don’t staff up until they have confidence in a sustained recovery. “We’ll see job growth by late summer or fall,” he says. The Conference Board’s Mr. Goldstein joins other economists in declaring that the events of September 11 didn’t cause the recession, and he doesn’t believe they will lengthen it. “What September 11 and subsequent events have done is to intensify the economic downturn, not necessarily stretch it out in time,” he says. “It certainly helped drop corporate profits, because all of the write-offs happened in the third quarter [2001], and that steepened the drop in profit loss. It had a big impact on consumer attitudes and some effect on consumer spending.” For George Borjas, an economist with the John F. Kennedy School of Government at Harvard University and a member of the Hispanic Business Board of Economists, the terrorist threat -- or at least the fear of it -- could throw a monkey wrench into the recovery. “People are very uncertain whether to invest or not. They don’t know what’s going to happen,” Mr. Borjas says. “Will we have more of these things going on? I think we’ll begin to see a turnaround...assuming things remain stable.” He believes the recovery might begin as soon as the middle of the year, on the basis of renewed business investment and better employment markets. Under the current circumstances, Mr. Borjas sees airlines and travel-related industries as indicative of consumer confidence and overall security. He suggests that because the travel industry may be the last sector to recover, its return to economic health could be considered proof of the overall economy’s recovery. “That will be a sign that things are back to normal,” he says.

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