Economists have agreed to disagree

Some analysts predict growth, while others forecast recession

Most say economy peaked

Inflation concerns, possible rate rise among factors

The economy

May 23, 1999|By William Patalon III | William Patalon III,SUN STAFF

Brendan Courtney, Baltimore-area director for Interim Financial Solutions, was home recovering from back surgery last week when a local banking client e-mailed him to say it was moving ahead with a major project planned for August, and wanted to know if the local temporary-help and employment-placement firm would help with any staffing needs.

For the client, the cacophony of inflation fears, a slowdown in housing starts and worries the Federal Reserve might force interest rates skyward is like the din of a distant thunderstorm you believe won't strike your town.

The decision to proceed is noteworthy because banks are more quickly affected than most businesses by changes in interest rates -- faring well when rates are low and struggling when rates rise.

"Here's an organization that's moving forward, despite what economic indicators seem to be saying" about higher rates and a slowdown in the economy, said Courtney.

The bank's confidence would seem to disregard a string of disclosures during the past two weeks that have been among the gloomiest to surface during the U.S. economy's record ninth year of uninterrupted growth.

In the past two weeks, a government report said consumer prices rose last month at the fastest rate since October 1990 and nearly double what was expected; analysts said car sales have topped out; housing starts plunged last month; and the Fed announced that it stands ready to tighten credit to keep inflation from taking hold.

Economists and analysts generally agree that the torrid U.S. economy has peaked, but that's where the agreement ends. Their projections hit both ends of the spectrum: from subdued-but-healthy growth to a deep recession hallmarked by an odious stock-market correction.

Most economists believe the U.S. economy -- and Maryland with it -- will be fine for at least a year and likely for longer. They consider the recent inflation figures an aberration, and say it's far from a sure bet the Fed will boost rates. They believe U.S. growth will slow to a sustainable pace, meaning consumers don't have to fear a big drop in their living standard.

"We don't have a recession on the radar screen at all," said Mark Vitner, vice president and economist with First Union Corp. in Charlotte, N.C.

But, as is the case in economics, that viewpoint is not unanimous -- hence the adage that "economics is common sense made difficult."

Deep recession

Deutsche Bank Securities is forecasting a deep recession that will begin in this year's fourth quarter and last about a year. The impetus: not higher interest rates, not inflation, but rather the Y2K software bug.

U.S. firms have pretty much exterminated the millennium bug, though small outbreaks will no doubt appear. But overseas suppliers to these U.S. firms haven't been as aggressive and their shortcomings will cause interruptions in the flow of information and needed foreign-made components, said Deborah E. Johnson, senior economist for Deutsche Bank.

The upshot: Output -- the measure of an economy's health -- will decline by 2.5 percent to 3 percent, constituting a recession. The Dow Jones industrial average could fall as much as 40 percent, to 6,500, as corporate profits are crimped because money is diverted to fix the worldwide software problem, according to Deutsche Bank Securities. Intermittent power outages and product shortages will add to the discomfort, though the forecast also calls for the Dow to rebound to 15,000 by 2005.

Even so, the downturn will be "pretty significant," said Johnson.

Few economists are such gloom-and-doomers.

Consumer report questioned

Most question the validity of a May 13 government report that said prices for consumer goods and services rose at their fastest rate in nine years. A spike in oil prices that is now subsiding was blamed for much of the jump, even for items such as apparel in which energy prices were not supposed to be a factor.

Indeed, a report last week said U.S. oil reserves had grown, which should be a harbinger for lower prices at the gasoline pump.

Since inflation is bad for bonds -- it erodes their value -- bond prices fell, pushing yields on the benchmark 30-year Treasury bond dangerously close to the 6 percent level most experts say would cause stocks to plunge. Bond yields are a leading indicator of the direction of overall interest rates, which rise in virtual lock step with upticks in inflation. Those yields have backed off, indicating confidence that inflation isn't as bad as first thought.

One local investment expert says interest rates will fall. "Yields [on bonds] will approach 6 percent before they approach 5 percent, but by year-end they will be closer to 5 than to 6," said Dick O'Brien, senior vice president for the Hunt Valley office of brokerage house Folger Nolan Fleming Douglas Inc.

Overseas economies

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