2003 prospects stuck in uncertain territory

Wild cards could stall speed of recovery

Maryland economy

January 12, 2003|By Bill Atkinson | Bill Atkinson,SUN STAFF

The prospects for Maryland's economy this year can be boiled down to a single word - uncertainty.

Most experts agree that the economy has emerged from recession and doesn't appear headed for a "double-dip," or sharp downturn. Indeed, they say, the year should be marked by modest growth.

But unlike the late 1990s, when the biggest challenge for economists was predicting the speed at which the economy would grow, this year is riddled with wild cards that could stall the recovery and undo progress that has already been made:

Most economists believe that war with Iraq is likely, and they worry about its duration. A prolonged conflict would shatter confidence among consumers and businesses, jolt the stock market, fuel unemployment and result in an even slower economy.

Consumer spending propelled the economy out of recession in 2001 and kept growing. Consumers snapped up houses, cars and other goods at a furious pace. But their confidence has tempered and there is a fear that they will pull back. A big retreat would be devastating since consumer spending accounts for two-thirds of the economy.

Gov.-elect Robert L. Ehrlich Jr. steps into office faced with a mammoth problem - a $1.8 billion budget deficit. If Maryland balances the budget with deep layoffs and higher taxes or fees, the state's economic recovery will be dealt a setback.

Sales of homes and automobiles were white hot last year as interest rates plunged. But both sectors began slipping late in the year and that is expected to continue this year. A mild cooling will not be profound, but a sharp downturn would almost certainly kill the state's chances for real growth.

Companies have been in a deep freeze. They haven't hired or spent money on inventory and capital equipment. While large-scale hiring is unlikely, a pickup in capital spending is critical to economic growth.

Situation in flux

"I think you have a profound uncertainty," said Richard P. Clinch, director of economic research at the University of Baltimore. "The [economic] indicators are all over the place. Some things are pointing down, and some things are pointing up."

Indeed, there is a wide range of opinions over where the economy will end this year.

At one end of the spectrum is James E. Glassman, senior U.S. economist at J.P. Morgan Chase & Co. in New York, who expects the nation's economy to grow by as much as 5.25 percent this year - if business expands and a potential war with Iraq is short.

He even expects investors to forget about the numerous financial scandals - Enron, WorldCom, Tyco International, Rite Aid and Arthur Andersen - that shook the stock market.

Optimism

"I think last year's issues will pass," Glassman said. "I can't remember a time when there was reason to be more optimistic than at this moment. My guess is by this time next year we won't be talking about the economy anymore."

At the other end of the spectrum is Paul Kasriel, director of economic research at the Northern Trust Corp. in Chicago, who says the economy will struggle because debt-laden consumers will cut spending. At best, he says, the economy will grow at 2.6 percent, well below its historic 3.4 percent average.

"I must say, I have some questions whether we will make it to that," Kasriel said. "It looks to me at best another year of very moderate, subpar growth."

But most economists believe that the economy will end up in the middle, growing at about the average rate. Maryland, they add, could expand faster than the nation, spurred by a handful of sectors.

"There will definitely be bright spots," said Scott Hoyt, director of consumer economics at Economy.com in West Chester, Pa. "We are definitely expecting some gradual improvements in the state's economy."

One of those will be Maryland's defense contractors, which employ about 15,000 workers in the state, and will benefit from the Bush administration's military buildup, economists say.

AAI Corp., a Hunt Valley-based defense contractor, for instance, will profit as it begins building 41 unmanned surveillance drones for the U.S. Army, which plans to spend $100 million on the project.

Defense giants

Billions of dollars are also headed for defense giants Lockheed Martin Corp. of Bethesda, and Los Angeles-based Northrop Grumman Corp., which has more than 10,000 employees in Maryland. The companies make everything from fighter jets to aircraft carriers.

Military "procurement spending is growing strongly," Hoyt said. "It will be a support to the [Maryland] economy as we go forward."

Service jobs - those in engineering, law, accounting and public relations - also should grow.

Even financial services companies, such as T. Rowe Price Group Inc., Legg Mason Inc. and Ferris, Baker Watts Inc., which have been beaten up by the stock market's three-year decline, should have a better year, experts said.

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