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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (7856)	1/4/2003 11:52:21 PM
From: calgal	Read Replies (1) \| Respond to of 306849

For '03 Economy, Cautious Hopes URL:http://www.washingtonpost.com/wp-dyn/articles/A8569-2003Jan3.html By John M. Berry Washington Post Staff Writer Sunday, January 5, 2003; Page H01 All the ingredients are in place for the U.S. economy to improve steadily this year, a large number of economists are predicting in their year-end forecasts. But many experts also are cautioning that several things have to break just right to turn last year's stuttering recovery from the 2001 recession into a sustained economic expansion that creates jobs and profits. "The U.S. economy is like a punch-drunk boxer, staggered by one too many blows but recovering quickly in the corner," said Ethan S. Harris, chief U.S. economist for Lehman Brothers in New York. "Absent new shocks, a recovery should begin by the spring or summer. . . . A favorable outcome to the Iraqi conflict should boost consumer and business confidence and underpin a recovery in the stock market." But "absent new shocks" is a major caveat these days, and forecasters are more guarded than usual. For example, Macroeconomic Advisers, a St. Louis forecasting firm, cites six items that would have to go "right" for growth to approach a 4 percent annual rate late this year, as it predicts. That compares with an estimated 2.8 percent gain achieved last year despite growth fading to a 1 percent annual rate or less in the final three months of the year. The firm's list: The stock market must trend higher, consumer spending must remain moderately strong, business confidence will have to improve, hiring will need to accelerate, business capital spending must turn up, and war with Iraq must either be avoided or resolved relatively quickly with minimal damage to oil production and distribution facilities. All six requirements are inextricably linked, with the overarching uncertainty the possibility of war. That prospect is hurting both consumer and business confidence because of the potential for a continued escalation of oil prices that could damage economies around the world. Macroeconomic Advisers has estimated the widely varying impacts of four Iraq scenarios, which it labels "no war," "benign," "intermediate" and "worse," though it cautions that "worse" is not the "worst" possible outcome. The economic impacts range from negligible to renewed recession, depending significantly on what happens to oil prices. In the "benign" scenario, oil prices rise briefly to the mid-$30 range and drop back into the low $20s per barrel late this year. Shifting war fears and the current strike of oil workers in Venezuela have caused prices to increase to about $25 in mid-November to $33 last week. In the "worse" scenario, oil production facilities in both Iraq and Saudi Arabia are badly damaged and oil hits $80 a barrel. In the latter case, the firm told its clients recently, stock prices would plummet and longer-term interest rates would shoot up. "Consumer confidence also weakens sharply. The cumulative result is a sharp and sudden weakening of the economy. Moreover, because other major countries also suffer the impact of falling stock prices and spiking oil prices, a global recession occurs," the firm said. The possibility of other terrorist attacks on the United States -- which might be spawned by war with Iraq or occur independently -- are also a serious worry. Last week President Bush said that an attack "from Saddam Hussein or a surrogate of Saddam Hussein would cripple our economy. This economy cannot stand an attack." In the face of such uncertainties, it is little wonder that many corporate executives, as well as economists, are being cautious to an extreme. Heads of manufacturing firms, in particular, are holding back on making commitments to beef up their inventories, hire new workers or increase their spending on new plants and equipment because they cannot predict with much confidence where the economy is headed. The administration is expected shortly to unveil a new set of tax cuts, calling for a reduction of taxes on dividends received by individuals and new incentives to spur business investment. The package will be billed as needed stimulus for the economy, though some economists doubt the proposals would do much to help, at least in the short-run. Once the war issue is resolved, most economists expect the U.S. economy to forge ahead -- with or without additional stimulus -- because many of the imbalances that caused the 2001 recession have been largely resolved. And both fiscal and monetary policies are in place to boost growth. For instance, businesses cut back production so sharply in 2001 that they managed to shed the excessive quantities of unsold goods built up in the economic boom of the late 1990s. They cut back, too, on spending on new plants, equipment and software until some of the excess production capacity created by an earlier surge in such investment was absorbed. The share of production capacity actually in use is still quite low. But some observers, such as Jerry Jasinowski, president of the National Association of Manufacturers, said that's because much of the idle equipment is obsolete