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Philadelphia Federal Reserve Bank President Anthony Santomero spoke with USA TODAY twice for this interview — once just days before the Sept. 11 terrorist attacks and again in early January. In early September, he was just beginning to sense the "mixed news" that might be signaling a turning point in the economy, from slump to the early stages of a recovery. But the attacks changed all that, worsening the downturn and erasing the faint signs of a rebound. Now he sees a recovery again but not a very strong one and no time soon. In this latest conversation with USA TODAY economic reporter George Hager, Santomero gives his view of where he thinks the economy is headed this year and talks about a key worry: what consumers will do. Excerpts:
Q: Is the economy headed for recovery?
A: The consensus had been for a recovery in the first quarter, and it seems to be slowly drifting to the second quarter. My own view is we have come a long way. Sept. 11 obviously was a negative shock to the economy, and the question was: How big a shock and how would consumers react? The good news is that consumer spending has held up quite well; 2002 is going to be a period of recovery.
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The foundation is being set as we speak. (The consensus says) the inventory (reduction) that has taken place over the last four quarters will start to lead to restocking. Consumers will hold up, government spending will increase, the weakness of world markets will subside somewhat. I think all of that's right, (but) there are a couple of risks I'm concerned about.
My concern is that what is necessary for a substantial recovery is that households continue to spend and that employment levels don't deteriorate as a result of bad retail sales numbers. There is a risk that the bounce-back in the first quarter or two will be a bit slower than what some forecasters suggest.
(Also, businesses') capital expenditure was part of the story in the decline in growth, (and) capital expenditure isn't going to stabilize and start to increase until the markets start to improve. That will require an increase in spending on the household side.
Q: Where do you disagree with the consensus?
A: I concur with the consensus forecasts that 2002 is going to be a rebuilding and recovery year. I think it's going to be a little bit slower than the consensus. I don't look for a strong bounce-back in the first or second quarter. We should keep in mind that unemployment rates will continue to climb until GDP growth is on the order of 2% to 3%, so even if the recovery begins in the second quarter, unemployment is likely to edge upward until midyear.
I'm pleased by the recent statistics that show some solid foundation numbers. (The way this works is that) all bad news turns into mixed news; then we build a foundation for positive growth going forward, and I think you're starting to see that.
Q: Have we hit bottom yet?
A: I hope we have hit bottom, and I really do think the next several weeks are going to tell.
Q: Where do you see consumers going?
A: What we are seeing at this point is a cautious consumer, a price-conscious consumer. There are early indications of a November-December retail sales number that is up slightly year-over-year. (Consumers are) still to a large extent spending, and (that's) relatively positive.
(But) consumers' caution will lead to some retrenchment in spending, and this is one of the reasons why I'm a bit cautious about what happens in the first and second quarters. They're likely to do a bit more saving and a bit less spending in the first quarter. To the extent that people feel ill at ease about (jobs), we are going to see some backing off (from spending).
Q: What about the business people you talk to?
A: They're cautious; they're not discouraged. They do not think that everything is back to the pre-2000 period of boom. They're sensitive to prices. You also see it in some of the retail sales numbers — top-end stores are somewhat weaker than bargain stores. That's all symptomatic of businesses and households that are watching their money closely.
Businesses are going to want to see the return of the customer before they return (to investing and hiring).
Q: What's your sense from what you see personally around Philadelphia?
A: My wife teases me about going to the malls and looking around at how many (shopping) bags there are. I do in fact wander around. I try to observe the traffic flows. I try to understand what's going on.
What I observed (recently) was a reasonable level of both traffic and purchases — more traffic than people might have thought, but no more purchases. There was a lot more traffic than bags. I for one will be watching very closely the statistics on December retail sales and what that bodes for the first quarter of 2002. |
