For a lens on this year, Sun economics writer Jay Hancock interviewed three respected analysts of the business scene in Maryland and beyond.

Q &a

January 24, 1999|By JAY HANCOCK

They are Patrick Arnold, director of labor market analysis for Maryland's Department of Labor, Licensing and Regulation; Anirban Basu, economist with the Regional Economic Studies Institute at Towson University; and J. Patrick Bradley, senior vice president and director of economic and investment research, Mercantile-Safe Deposit & Trust Co.

Let's start with the country. Pat [Bradley], how did the national economy do last year?

Bradley: If you just looked at the overall growth rate of the economy for the last year -- and that was somewhere between 3.5 and 4 percent in inflation-adjusted terms -- if you just looked at that number, you'd have to say the economy had a pretty good year. There was good consumer spending, continued job growth, a low unemployment rate, a favorable equity market. But when you start to break that number apart, you see that the economy was really a study in contrasts. A very strong domestic economy. A very weak export economy. And that was really the tale of 1998.

Pat thinks national gross domestic product growth for '98 will be between 3.5 and 4 percent. Anirban, how does that square with your projections?

Basu: That's absolutely in line with our own projections. We think the fourth quarter of 1998 is going to come in around 3.3 or 3.4 percent, which means that the year will end up at 3.6 or 3.7 percent.

For people who don't think about this stuff every day, how good is 3.6 percent?

Basu: It was another good year. In fact, a terrific year. As a rule of thumb the long-run growth rate of the United States is around 2.5 percent. Actually, coming into this decade, some economists suggested that it was more around 1.8 to 2 percent. So if you think about 3.5 percent, that's quite impressive.

Pat [Arnold], your observations on U.S. growth?

Arnold: I think it's going to end up between 3 and 3.25, real GDP.

For '98?

Arnold: For '98. For '99, I see it shrinking considerably. I think it will be in the 1 to 1.5 percent range for inflation-adjusted growth for the nation.

Pat [Bradley], what's your projection?

Bradley: I think growth in '99 will be 2.5 to 3 percent.

Basu: We're between 2.5 and 3 percent also. The reason is, a lot of the forces that were at work coming into 1998 are really at work coming into 1999. Coming into 1998, economists correctly predicted that the Asian crisis might have a positive effect on the U.S. economy by moderating interest rates. Well, that's exactly what has taken place. And the U.S. consumer continued to spend in 1998. For 1999, we have similar phenomena at work. The manufacturing sector is actually in recession, according to the purchasing managers' index, and we have a very poor outlook for manufacturing. And we've already seen in Maryland numerous companies announcing layoffs.

And we think we're going to see many more layoffs this year in Maryland. That's bad on one hand. On the other hand, it suggests that the Federal Reserve probably will not tighten in such an environment and that we'll continue to have favorable interest rates.

You think the Fed might loosen interest rates?

Basu: I don't think they'll loosen right now.

But during the year?

Basu: There are countervailing forces. On the one hand, you have tight labor markets. You have a stock market that continues to return perhaps in excess of what it should, given corporate earnings. But then again, you have a softening manufacturing sector, and you probably will have some softening of other portions of the economy as well.

Pat [Bradley], do you think the Fed will lower interest rates this year?

Bradley: I think they will loosen one, maybe two more times.. Not because I think it is necessary, but I think they'll take an insurance policy out.

Pat [Arnold], you're a little more pessimistic than these guys for the national economy this year. Why?

Arnold: I think the estimates that we heard from the other two participants reflect a year in 1999 that's too much like 1998. And I think that, at least in the third and the fourth quarters of 1999, nationally, we will see a slowdown.

What's going to cause that slowdown?

Arnold: I think the consumer will keep the momentum going into 1999, but by the third and fourth quarters, I think spending will retreat.

Is that a result of the growing consumer debt and low personal savings that everybody is worried about?

Arnold: That and a slowing of income. We already have a very low savings rate. It's been noted that one of the reasons consumption has been as high as it is -- higher than you would expect from income levels -- is that people have been living off equity, off capital appreciation.

From the stock market?

Arnold: From the stock market. Cashing in their holdings, or by feeling good about their holdings and spending from other sources.

Is a consumer retreat the main threat in 1999?

Arnold: It's an important challenge, but there are other factors that would contribute to a slowdown, if it does occur.

What are they?

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