For further information: Gail D. Fosler (212) 339-0300
For Release Thursday, September 6, 2001 Release #4658A
U.S. ECONOMY READY TO REBOUND, BUT INFLATION AND RESTRUCTURING THREATEN ECONOMIC STABILITY THE CONFERENCE BOARD SEES 3.2% GROWTH NEXT YEAR
The U.S. economy will rebound in the second half of the year and generate GDP growth of 3.2% next year, but weak profits and inflationary pressures are becoming growing worries, The Conference Board reports today in its latest economic forecast.
The forecast, by Gail Fosler, The Conference Board's Senior Vice President and Chief Economist, is developed monthly for members of The Conference Board. Fosler was winner of the Blue Chip Economic Forecasting Award and twice won the Wall Street Journal's forecasting award in 2000.
The Conference Board's U.S. Leading Economic Index bottomed in March and has advanced consistently since then, pointing to recovery in America's industrial activity early this fall. But business profits continue to erode, with latest figures showing greater deterioration than first estimated. Some key projections from The Conference Board: unemployment will average 4.6% in 2002; the CPI will average 3.7% in 2002; and real consumer spending will average 3.1% in 2002.
'THE TRUE RECESSION IS AHEAD'
While the economy is poised for a rebound, major structural problems remain. Says Fosler: "As sudden and severe as the slowdown in industrial production was this year, the worst is over and a generalized improvement lies ahead. What is truly disturbing is the fact that the reacceleration in economic growth will do little to fundamentally improve the corporate cost or profitability picture. This leaves the United States in a condition of 'local vulnerability' -- in this case to higher inflation and more business restructuring. The true recession, therefore, is ahead."
BUSINESS WILL SPEND AGAIN"The degree of inventory liquidation and investment decline in the second quarter is not likely to be repeated in the third quarter," says Fosler. "The magnitude of inventory drawdown is one of the largest six-month declines in history, and the decline in business capital spending hasn't been seen since the first half of 1991."
Much of the investment in recent years has been motivated by a desire to increase efficiency and product capability, rather than capacity. Rising unit labor costs suggest that this motivation has not gone away.
"When the current defensive mood passes, business will be compelled by the marketplace competition to spend again," says Fosler.
HIGH-TECH STABILIZING
The high-tech sector's plunge also appears to be stabilizing, although at low levels. The magnitude of the decline and the fact that the three-month annual rate is rising above the year-on-year comparison suggest that the dynamics for a full recovery are in place. With July's improvement in both rates, and the notorious volatility of the sector, the recovery could be sudden and sharp.
"Given the importance that the Federal Reserve Board accords to business profits as a cyclical force, it is virtually certain that the Fed will cut short-term interest rates by another 50 basis points," says Fosler.
But the coming rebound will not restore corporate profitability to its previous highs. Behind the decline in business confidence last December and the recent inventory and investment decline was a substantial credit crunch, reflected by the deterioration in the high-yield market. The severity of the contraction in bank credit has made cash flow as important a business objective as earnings. The January cut in the Fed funds rate restored the flow of liquidity, but these same circumstances will reappear with even greater intensity, although probably not until later in 2002 or beyond. This phase of the business cycle eventually offers the Fed the unhappy choice of keeping rates low and permitting businesses to raise prices, or raising interest rates, restricting liquidity, and forcing defaults.
A SLOWDOWN IN GLOBAL ECONOMIC GROWTH
The slowdown in global growth has been more severe than expected. Of the seven countries other than the U.S. for which The Conference Board releases monthly indexes, two -- Mexico and Australia -- have improved in recent months. Taken together, all of The Conference Board's leading indexes -- reflecting more than 60% of global GDP -- suggest that the global recovery is not yet in place.
# # #
Source: StraightTalk, Volume 12, Number 7The Conference Board
RSS