Fed's Guynn Sees U.S. Growth at 3% Rate by Mid-Year
By Simon Kennedy and Will Edwards
Atlanta, Jan. 7 (Bloomberg) -- The U.S. economy will probably contract in the first quarter before growth recovers to about a 3 percent growth rate by the middle of the year, said Jack Guynn, president of the Federal Reserve Bank of Atlanta.
``On balance, I'm reasonably confident that nearly all of the adjustments we've been witnessing will be substantially completed by midyear and that the conditions for healthy growth will have been reestablished,'' Guynn told the Rotary Club of Atlanta.
He said he isn't ready to declare victory and say the economy has stabilized. ``It would be premature to make that kind of call,'' Guynn said in a question and answer session with reporters. And he declined to say what Fed's policy-setting Open Market Committee would do at its next meeting Jan. 29-30.
The Fed would be able to lower interest rates for a 12th time since the start of last year, if necessary to give the economy another nudge, he told reporters. ``We have some more room and if we need it my presumption is that we will use it,'' he said. The Fed's benchmark overnight bank lending rate is now at a 40-year low of 1.75 percent.
Fed Chairman Alan Greenspan, who hasn't spoken at length on the state of the economy since October, plans a speech on the subject Friday in San Francisco. Greenspan met today with President George W. Bush and declined to comment to reporters.
The economy fell into recession last March and contracted at a 1.3 percent annual rate in the third quarter. Guynn said in his speech that he expects additional shrinkage ``for another quarter or two'' before growth rebounds in the second half of 2002.
Growth Expectations
That's ``not the heady 4 to 5 percent growth some commentators had predicted was here to stay, but certainly a respectable level,'' he said. The median of 42 forecasts in a Bloomberg News survey in December shows economists expect a 0.1 percent pace of GDP contraction in the first quarter, rising to a 2.5 percent growth rate in the second and better than 3.5 percent in the final two quarters of the year.
The Fed's interest-rate reductions last year were among the factors that ``provide considerable support for a significant economic recovery,'' he said.
``Lower interest rates have already allowed consumers and businesses to reduce their debt service burdens, thereby supporting the ongoing adjustment process,'' Guynn said.
Cheaper energy prices would also will boost business and consumer spending, as would tax cuts implemented last year, Guynn said. Retail gasoline ended 2001 down 22 percent at $1.96 a gallon and the government mailed $38 billion in tax refund checks as part of a $1.35 trillion tax cut package enacted by Congress.
Renewed stockpiling by businesses will also underpin growth, he said. Inventories fell a record $69.1 billion in the third quarter, when measured at an annual rate, and Guynn echoed most analysts in expecting that decline to be reversed soon.
Inventories Low
``Inventories in most industries have been worked down to low levels, and production will soon have to be increased to accommodate even a continuation of current demand conditions,'' he said.
``A return to business profitability is going to be the key'' for the economy's recovery because that would lead to a resurgence of business investment, Gyunn said.
The economy expanded at a better than 4 percent annual rate from 1997 through 2000, fueled by an ``unprecedented'' surge in investment in computers and telecommunications equipment, he said. That came to an end when investors realized their ``profit expectations never developed into actual profits,'' he said, leading to the economy's slowdown.
The result was a decline in investment in the second and third quarters of last year. While capital spending probably declined again in the fourth quarter, it fell at a slower rate than previous quarters, Guynn said.
Financial System Sound
The financial system also is sound and that will aid the economy when ``businesses are ready to begin investing again,'' he said. Inflation is likely to remain in check and that's ``very good news for the U.S. economy,'' he said.
Since the Fed last lowered the overnight rate on Dec. 11, there are signs the economy is beginning to stabilize, Guynn said. ``You see it in some of the manufacturing data, decelerating at least at a lesser rate than it was before,'' he said. ``We're seeing some positive numbers here and there.''
Still, Guynn said the economy faces some rough times as firms keep cutting costs, raising the jobless rate above the 6 1/2-year high of 5.8 percent reached in December.
``We know from past experience that the unemployment rate usually continues to increase for a few months even after growth returns, so things on the labor front could actually get a bit worse even after the economy starts to grow again,'' he said.
Employment Improves
He said he ``takes some heart in recent data anecdotally and even in the last report'' on unemployment. ``We are getting some early signs that labor markets may not be deteriorating as much as they were some months ago,'' Guynn said in his session with reporters.
Not everyone shares Guynn's optimism about the world's largest economy. Stephen Roach, chief economist at Morgan Stanley Dean Witter & Co., said today that stepped-up production in coming months would likely be met by slowing demand, leading to a second contraction in growth.
Nineteen of 24 economists at banks that trade directly with the Fed also predicted Friday that the central bank will cut the overnight rate by a quarter percentage point to 1.5 percent on Jan. 30, according to a Bloomberg News survey. |
