U.S. Economy to Rebound in 2nd Quarter, Survey Shows
from Bloomberg
By Brendan Murray and Alex Tanzi
Washington, Dec. 21 (Bloomberg) -- The U.S. economy probably will start expanding by the second quarter of next year, following three straight quarters of contraction, while residual effects of the first recession in a decade push unemployment to an eight-year high, a survey of economists showed.
Gross domestic product probably declined at a 1.4 percent annual rate in the final three months of this year and will shrink at a 0.1 percent pace in the first quarter, according to the median of 42 forecasts in a Bloomberg News survey. The survey was conducted Dec. 10-20.
By the second quarter, GDP is expected to be expanding at a 2.5 percent rate and growth is likely to accelerate to a 3.9 percent pace by year's end, the survey showed.
``We're going to crawl out of this slowly,'' said Robert MacIntosh, chief economist at Eaton Vance Management in Boston. Consumer spending ``will be strong enough to give us modest, positive growth'' by mid-year, he said.
The economy fell into recession in March, and GDP shrank at a 1.3 percent rate in the third quarter, the Commerce Department reported today, the biggest drop since the end of the last recession in 1991.
Missing the Mark
Most forecasts in the Bloomberg News survey a year ago missed that the economy would contract at all and the median forecast was for growth of 3 percent for all of 2001. MacIntosh, however, predicted growth of 1.1 percent for this year. That almost matches the year's likely 1 percent growth rate, based on a Bloomberg News analysis of reported statistics and current estimates. And he was the closest among those in last December's survey to picking the rate of GDP growth for the year.
MacIntosh predicts the economy will expand at a 0.8 percent rate in the first quarter of next year, rising to a 3.4 percent pace by year's end.
Factory production may not rise quickly enough to stop companies such as Motorola Inc. and FleetBoston Financial Corp. from firing workers or putting off hiring plans, the survey showed. The jobless rate is likely to peak at 6.2 percent by the middle of 2002 and average 6.1 percent for the year, the survey found. Unemployment hasn't been that high since July 1994.
Firings Lag Growth
Companies typically continue to dismiss workers even after the economy starts to rebound. Rising joblessness weighs on growth because it erodes incomes and spending.
``We do have a hiring freeze on,'' said Jim Davis, chairman of New Balance Athletic Shoe Inc., in an interview. Although ``everybody's more cautious now,'' the economy ``will start to turn around within six months,'' he said.
Still, consumer confidence is rising and the University of Michigan reported today its sentiment index is higher than at any time since the September terrorist attacks.
Buttressing the recovery is a series of interest-rate reductions by Federal Reserve policy makers, who lowered the benchmark overnight bank rate to a 40-year low of 1.75 percent this month. The rate tends to influence the cost of borrowing for credit cards, auto loans, and some business loans.
``Following Sept. 11, the Fed finally pushed rates low enough to generate some steam in the economy next year,'' said Brian Wesbury, chief economist with Griffin Kubik Stephens & Thompson in Chicago.
The Fed is likely to lower the overnight rate once more in the first quarter by a quarter percentage point to 1.5 percent, the survey showed. The yield on the benchmark two-year note is expected to fall to 2.90 percent at the end of the first quarter from 3.12 percent today, and the yield on the benchmark 10-year note is likely to fall to 4.90 percent from 5.07 percent.
Rate Increase Likely
By the end of next year, the Fed will have raised the overnight rate to 2.75 percent -- a percentage point above where it is now. Two-year and 10-year yields are also expected to rise.
Inflation as measured by the consumer price index will probably remain tame as companies hesitate to raise prices during a recovery, according to the survey.
The CPI will probably be 1.5 percent higher at the end of the second quarter than a year earlier, the smallest year-over-year increase since November 1998. By the end of next year, consumer prices will be 2.2 percent higher than now, exceeding the expected 2 percent inflation rate expected for all of 2001.
The most optimistic economist in the survey, Richard Yamarone of Argus Research Corp., predicts a quick recovery. He forecast expansion at a 2.1 percent rate in the first quarter and growth of 3.5 percent for all of next year.
Some businesses share Yamarone's upbeat sentiment. AMR Corp.'s American Airlines began recalling about 800 telephone sales agents this week because the volume of calls it is receiving at reservations centers is rising.
Best Buy, Circuit City
Best Buy Co. and Circuit City Group this week said profits rose in the fiscal third quarter, which included November. Both chains sold more big-screen televisions, digital cameras and video- game consoles. Sales at electronics and appliances stores rose 1.8 percent in November, according to the Commerce Department.
``We see a recovery under way,'' Frederick Smith, chairman of FedEx Corp., told Bloomberg Television. ``We think the recovery has already begun to take hold, and it will be visible to everyone by the second quarter of next year.''
Lower taxes are also expected to underpin growth. Congress gave taxpayers an advance tax refund of about $38 billion earlier this year and approved $45 billion in emergency spending after the terrorist attacks.
Stocks, which slumped following the attacks, have recovered those losses, buoying confidence and spending. The Standard & Poor's 500 Index is 5 percent higher than when terrorists struck the heart of New York's financial district. The Nasdaq Composite Index is up 15 percent.
Business Investment Weak
One of the least optimistic forecasts was from David Orr, chief economist at Wachovia Securities in Charlotte, who expects sluggish auto sales and weak consumer spending on durable goods in the first half of 2002. Companies are cutting back on year-end bonuses and automakers won't be able to top zero-interest financing offered in the past two months as incentives to buy cars and trucks next year.
``I don't see how you can have a strong, quick recovery without that pent-up demand,'' he said.
As a result, companies may delay additional purchases of capital equipment until the second half of the year, Orr said, citing a Fed report from the third quarter showing companies spent more on equipment than they generated in cash flow.
Through the first nine months of 2001, U.S. firms either borrowed or raised capital through equity markets to finance equipment purchases, a trend that will have to change if a robust recovery is in the offing, Orr said. Capital spending by non- banking companies in the third quarter fell to $837 billion, from $1.01 trillion a year earlier, according to the Fed.
``Profits are still pinched,'' said Orr, who forecasts that GDP will contract at a 1 percent rate in the first quarter before expanding at a 1.5 percent pace in the second. ``Companies don't have the cash flow and won't have the cash flow to strongly increase capital spending.''
Adding to the difficultly in predicting the direction of the economy next year is the potential economic fallout in the U.S.'s war on terrorism, economists said.
``The risks in 2002 are on the downside,'' said Carl Tannenbaum, the chief economist at ABN Amro North America Inc. in Chicago.
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Best Regards, J.T. |
