The U.S. Economy Faces Little Growth in 2002 Library: BIZ Keywords: ECONOMY AMERICA STATES RECESSION GROWTH UNEMPLOYMENT TERRORIST FORECAST Description: The U.S., facing a likely decline in Gross Domestic Product in the final quarter of this year, is in danger of falling into its 11th postwar recession, according to a new Conference Board analysis.
Further information: Gail D. Fosler (212) 339-0300
For Immediate Release Release #4666A
THE U.S. ECONOMY FACES LITTLE GROWTH IN 2002 TERRORIST ATTACKS DAMAGE U.S. BUSINESS OUTLOOK
Oct. 23...The U.S., facing a likely decline in Gross Domestic Product in the final quarter of this year, is in danger of falling into its 11th postwar recession, according to a new Conference Board analysis released today.
A report prepared for Conference Board members around the world projects GDP growth of 1.1% this year and only 0.9% next year. Unemployment is expected to climb from 4.8% this year to 6% in 2002. While many forecasters are looking for a deep decline and a strong rebound, The Conference Board's forecast shows a milder downturn but a weaker recovery.
"While the economy is recovering from the psychological impact of the terrorist attacks, the business sector is still facing a very real liquidity clash between huge external borrowing requirements and less accommodating financial markets and lenders," says Gail D. Fosler, Senior Vice President and Chief Economist of The Conference Board, in the latest issue of StraightTalk. "The terrorist attacks were a direct hit to corporate profits, exacerbating still further the pressure on working capital, the risk of lending, and the decline in the liquidity among traditional sources of funds, like insurance companies."
Real consumer spending will grow 2.8% in 2001 but only 1.3% in 2002. The job outlook, however, is deteriorating rapidly in all regions of the country. More significantly, consumer expectations have fallen back to recession levels, which does not bode well for future consumer spending, even given the impact of the tax cuts.
Real capital spending will decrease 3.7% in 2001 and 5.5% in 2002. Corporate profits will range from flat to sharply down. During the next few months, the benefits from the various forms of stimulus (lower interest rates, tax cuts, loan guarantees, transfers to affected families and cities, even a prospective package of business and personal tax cuts) will be offset to at least some extent by rising business costs (transportation, insurance, security, etc.). These costs will come directly out of business profits unless prices rise more than seems reasonable to expect at this time.
MAJOR WEAKNESS IN NATIONS OUTSIDE THE U.S.
Fosler notes that The Conference Board's Leading Economic Indicators outside the U.S. have generally been declining since the middle of last year, with new weakness emerging even among countries previously showing some strength.
Says Fosler: "Recession is already likely underway in several countries, the most obvious being Japan. Given the normal lag time between an improvement in these indexes and an improvement in economic conditions abroad, we should expect economic conditions to deteriorate through most of next year. At this point, the biggest gap between perceived risk and economic reality lies in Europe, where The Conference Board's leading indexes are declining sharply."
THE REAL PROBLEM IS NOT THE CONSUMER
A business liquidity squeeze of truly historic proportions is occurring. The liquidity squeeze is prompted by the sharp drop in business profitability and is being worsened by a heightened sense of financial risk in a number of the important lending markets, such as commercial paper. Although the Federal Reserve Board's interest rate cuts have reduced the price of credit, they have not made credit substantially more available, and the sharp decline in equity values (over $5 trillion to date) undermines the asset base that supports the required financing. Financial investors are staying home from many of the debt markets, even though equity markets have improved.
The Conference Board analysis notes that corporate profits have been persistently weak, cash flow has declined in absolute dollar terms, and the financing gap -- the difference between cash flow and working capital requirements -- is at an all-time high, reaching almost $325 billion at the end of 2000.
As a consequence of the drop in credit quality, the commercial paper market essentially vanished -- a large ($150 billion) drawdown in commercial paper continues today, and bank lending has declined sharply. The drop in equity values helped to undermine the asset base that sets the benchmark for available lending. The result is a contraction in bank lending unprecedented in the past 30 years.
The inventory drawdown through the second quarter -- one of the largest in history -- totaled nearly $1.2 trillion. Correspondingly, capital spending began to decline in the spring, a decline which appeared to continue, although at a somewhat slower rate, through the third quarter.
"While these economic trends may all be of great concern, there are structural changes underway that involve a greater role of government in society," concludes Fosler. "We will see potential changes in lifestyle and consumer preferences and emerging and growing social/economic divisions resulting from a prolonged period of economic weakness."
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Source: StraightTalk, Volume 12, Number 9 October 2001, The Conference Board
NOTE: In the current StraightTalk, Fosler offers three wholly different scenarios on the economic outlook and tells the likelihood of each of these coming true.
===== Kevin Dean Buffalo, NY ICQ: 8616001 http://www.yaysoft.com
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