U.S. economy expected to be slow-growing

Breakneck tempo of late 1990s is history, analysts determine

Now in `era of single digits'

May 12, 2002|By Bill Atkinson | Bill Atkinson,SUN STAFF

The nation's wobbly economy is showing signs of strength as the halfway point in the year approaches, but it will not mirror the late 1990s, which cruised at breakneck speed with a soaring stock market and jobs for everyone.

While many economists agree that the country has emerged from recession, they expect slow growth for many more months. And they warn that those who are anticipating a quick return to the euphoric era of the last decade will be sorely disappointed.

"You can kiss that era goodbye. It is gone, it is not coming back," said Richard Berner, chief U.S. economist at Morgan Stanley in New York. "This is going to be an era of single digits in the markets and lower growth expectations."

John Silvia, chief economist at Charlotte, N.C.-based Wachovia Corp., agrees.

"A lot of people may not see significant progress in the economy, but they will see some progress," Silvia said. "For the average Joe out there ... what you are going to see is disappointing growth."

Maryland's economy should do slightly better than the nation's overall, said Charles W. McMillion, chief economist at MBG Information Services, a Washington business information analysis and forecasting firm.

"I think that Maryland will have positive job growth year over year by this summer," he said. "That is probably not going to be the case for the nation as a whole."

But Maryland's economy, like the nation's, "is really sluggish," McMillion said.

The Federal Reserve Board essentially agreed with that assessment last week when it left the benchmark overnight rate at its 40-year low of 1.75 percent.

"The Fed is hedging against the risk of a double-dip slowdown ... not a recession per se, but certainly still hedging its downside risk, even though it says the risks for the economy overall are balanced," said Diane Swonk, chief economist of Bank One Corp. in Chicago.

The key to what happens lies largely with the consumer, whom Swonk refers to as the "Atlas." Consumer spending makes up two-thirds of the economy, and people have spent mightily during the recession.

Before the Fed boosts rates, it wants to see businesses begin to expand and the economy rely less on the consumer, Swonk said.

"In business investment, they are not looking for large gains, but they want to see at least some re-balancing of the economy occur before they take back the insurance policy they had given us after Sept. 11," she said.

Delicate condition

Some experts argue that the economy is in such delicate condition that it could stumble and shrink by posting a quarter of negative growth even after the growth rate in gross domestic product surged 5.8 percent in the first three months of the year.

Stephen S. Roach, chief economist and director of global economic analysis at Morgan Stanley, expects such a "double-dip." He sees consumers pulling back on spending, and a fall off in residential construction, which has soared because of the unseasonably warm winterin what he calls a "demand relapse."

"Traditional sources of pent-up demand have been spent," Roach said in an April 15 research report. "Moreover, there is the legacy of structural excesses that built up during the boom - sub-par saving, record debt loads, lingering excess capacity, and a massive current-account deficit.

"The result is a shaky economy that is susceptible to the slightest of shocks."

But Roach and other double-dippers are in the minority.

Most economists believe that the country has climbed out of recession for good.

They expect the economy to grow in the 2 percent to 3 percent-range in the second quarter, and some see it speeding up to about 4 percent toward the end of the year.

The key to growth, in part, will be how much consumers spend.

Consumer spending grew a brisk 7.1 percent annual rate during the past six months, Berner said. That compares to an average annual rate of 3.76 percent during the past 10 years.

Consumers have bought cars, houses, furniture, appliances and electronic equipment. Berner expects consumer spending to slow to a more normal range of about 3 percent this year.

"The double-dippers think that the consumers have yet to pay back for all of the sins in that exuberant period and retribution time is around the corner," Berner said. "I think we will see solid growth. The fundamentals for consumer spending are OK."

Corporations rebound

Corporations are also showing signs of recovery. Productivity jumped to its highest level in 19 years in the first quarter as companies turned out more goods with fewer workers.

"The productivity number was huge," Silvia said. "It would suggest ... good economic growth with the ability of companies to increase output without any workers. It signifies continued expansion with lower than expected inflation and probably slower than expected employment growth."

Alan D. Levenson, chief economist at T. Rowe Price Associates Inc., a Baltimore-based mutual fund company, believes that a recovery is well under way.

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