80% Chance Of Recession In 2001 - UCLA Study
Posted: 06-28-2001 01:40 PM
Posted By: Sean
LOS ANGELES, CALIFORNIA, U.S.A. 2001 JUN 28 (NB) -- By Michael
Bartlett, Newsbytes. The economic picture has brightened slightly in
the last three months, but the UCLA Anderson Business Forecast still
rates the probability of the United States experiencing a recession
in 2001 at 80 percent.
The quarterly outlook, released today, calls for "sluggish growth"
through the end of the year, followed by two quarters of negative
growth beginning no later than the first quarter of 2002.
International economist Edward Leamer directed the national
forecast. Tom Lieser authored the long-term economic outlook for
California, which recently passed Italy and France to become the
world's fifth largest economy - but is battling a slowdown in the
technology sector as well as an electricity supply crisis.
In December, the UCLA Anderson Business Forecast put the probability
of the United States experiencing a recession in 2001 at 60 percent.
In April, the economists responsible for the study upgraded the
chance to 90 percent.
The "unprecedented aggressive rate cutting by the Federal Reserve,"
combined with the scheduled tax cut, has improved America's chances
of dodging the economic bullet, however slightly.
"We expect slow growth, rising unemployment, worrisome inflation and
no interest rate cuts after the one this week," said Leamer, a
professor of economics and statistics at UCLA's prestigious Anderson
School of Management.
Wednesday, the Fed cut the benchmark federal funds rate a
quarter-percentage point to 3.75 percent. The quarter-point cut
followed five half-point cuts in the first half of this year. Since
Jan. 3, the Fed has cut interest rates by 2.75 percent in an effort
to stimulate the economy.
In the last two UCLA Anderson Forecasts, Leamer has suggested that
Fed Chairman Alan Greenspan should slow the pace of interest rate
cuts and give the earlier cuts a chance to work. Leamer told
Newsbytes he is concerned about future inflation.
"If I was sitting in on these meetings, I would say there has been
enough rate cuts, give it time," he said.
Leamer pointed to the historical example of the mid-1960s, when the
Fed tried to keep the Kennedy/Johnson expansion going by lowering
interest rates. "There was growth after the cut, but that growth was
from government expenditures on the Vietnam War. The rate cuts
brought inflation for the rest of the 1960s."
Leamer said the U.S. presently is in a precarious position because
it is carrying a large trade deficit. He said the deficit, combined
with rate cuts, means inflation worries.
Leamer said the leading indicator of trouble ahead is the slowdown
in business investment expenditures that began in the fourth quarter
of last year. He said that the rise in consumer spending earlier
this year is not enough to stave off recession, because investment
is the locomotive, while the other components of gross domestic
product are freight cars.
Rate cuts by the feds are not going to be enough to "pull the
train," he added.
Northern California gave the world the "Gold Rush" in the 19th
Century, Leamer noted. Continuing with the train analogy, he said
the "Internet Rush" that emerged from the San Francisco Bay Area in
the last years of the 20th Century was a locomotive that pulled the
Bush/Clinton expansion from 1995 to 1999.
"The economy is going to move ahead at a reasonable clip when the
New Economy revives, but not until it does," Leamer declared. "It is
a locomotive that is sitting on the sidelines after being a very
powerful engine for four or five years."
Time is an important component to the New Economy's revival, he
added. "Time makes the equipment businesses bought last year
obsolete. Businesses have to feel like they need to purchase new
equipment. The U.S. corporate sector is suffering from low
profitability."
The Internet Rush was marked by boundless consumer optimism and a
belief that a perpetually rising stock market would take care of the
future. Leamer said the current downturn has caused stock prices to
drop and businesses to tighten their belts, but consumers do not
seem to be getting the message.
"Historical data shows that economic downturns are fairly
short-lived, but consumers need to change what they are doing. They
continue to buy houses and cars as if the future is as good as the
equities market in 1998. Consumers need to shift away from spending
and towards saving. They need to start planning for their retirement
the old fashioned way - saving," he added.
Consumers who still are buying cars and houses while building their
debt as if the Internet Rush were still operating are, "enjoying the
rides at Fantasy Land," said Leamer.
Wall Street salespeople are trying to push the notion that recovery
will look like a "V," said Leamer. The theory is, "the worst is
behind us, better move fast to buy stock before someone else does."
Other economists are predicting a "U" recovery, or a couple of
quarters of sluggishness before recovery.
Leamer, on the other hand, predicts that sluggish growth could
continue for several quarters, making the presumed recovery an "L."
"An 'L' is a 'U' whose upward stroke is unknown yet," he said.
After a five-year stretch of leading the nation's economy thanks to
the explosive growth of the technology-rich Silicon Valley,
California is tottering on the brink of negative growth.
Tom Lieser, senior economist with the UCLA Anderson Forecast, said
the Internet bust is hurting the state's economy, and the effects
already can be seen.
"California not only is not out of the woods, it may be a drag on
the national economy in the second half of 2001 - particularly with
the power crisis," said Lieser.
California has had three rounds of rotating power outages (also
known as "rolling blackouts") in the first half of the year. These
outages are ordered by the California Independent System Operator
whenever demand exceeds generation capacity to keep the entire
electrical grid from collapsing.
California officials have made numerous accusations of sabotage and
deliberate withholding of electricity by suppliers to drive up
prices. The state is racing to finish construction of two new power
plants before the heat of the summer kicks in, which increases
demand.
Although there have been many rumors that technology businesses will
move out of California due to the uncertain power supply, Lieser
said it is not easy for one company or even a group of companies to
leave the interconnected environment that exists in the state.
"Some areas in the country have managed to lure high-tech companies
away - Austin, Texas is a particular success story - but still there
is not another critical mass like the Bay Area," he said. "Certainly
the cost of business will make an impact, but networking, being
close to suppliers and buyers is important. In addition, the Bay
Area contains intellectual capital, such as specialized legal advice
and venture capital companies, all together in one place."
Like the rest of the country, California is trying to find its way
now that the dot-com boom is over. Lieser boldly declared that the
"Internet wealth effect" is now dead. He cited the fact that
unemployment in Santa Clara County, which includes the Silicon
Valley area, is up. In addition, he said there has been zero growth
in consumer spending (as measured by taxable sales) for two straight
quarters.
"I do not think wealth is fueling expansion in California any
longer, except in some real estate areas," he said. "In the past
couple of years, stock options and bonuses were having a phenomenal
effect on income growth, retail spending and real estate. They added
4 to 5 percent to the macro growth rate for California, and set us
apart from other regions of the country."
Lieser said stock options became popular with both management and
employees as a substitute for actual wage increases. Technology
companies popularized the trend, but it extended to other companies,
as well, he said.
"In the long term, it probably will be a new trend in both
compensation and retirement options," said Lieser.
Lieser thinks part of the dot-com bust can be attributed to
saturation of the technology marketplace.
"Many business plans depended on continuation of the growth we saw
in the last five years and the upgrading of computers. But these
things have slowed down. The consumers are not upgrading as fast as
the manufacturers are putting them out," he said.
In the decade since the end of the Cold War, the California economy
has switched from being largely dependent on defense spending to
business services. Lieser said roughly 30 percent of business
services is computer services, including software development and
Internet service providers (ISPs).
"Software development was a principle driver in the California
expansion, but it seems to have stalled out," he said. "The service
part of the high technology business has been just as important as
the manufacturing part to California."
Lieser said the traditional business cycle - often referred to as
the inventory cycle - used to be one bad year in four. California's
specialization in information technology has changed that.
"Now the state lives and dies by the market, but that is better
long-term than being dependent on defense. With defense, you have
one customer, and a purchase environment that depends on a perceived
threat," he said. "What was one bad year in four is now one or two
bad years in 10. That to me is the New Economy." |
