Sunday, January 27, 2002

State of economy worrisome, but recovery in offing

Many see rebound by second half of year

By Brian Tumulty
Gannett News Service

        WASHINGTON — A recession that began in March and a terrorist attack in September.

        These two events shrank the American economy in 2001.

        A year ago, the forecast out of Washington was for a new decade that would generate $5.6 trillion in federal budget surpluses that might disrupt the economy by eliminating the national debt too quickly.

        The Bush economic team took office telling their chief executive that a huge tax cut, prescription drug benefits for the elderly, protection of the Social Security surplus and elimination of the national debt could be tackled in unison.

        But in 2002, the same administration is publicly warning that the next budget will address the urgent needs of a new world view by increasing defense spending by $48 billion and homeland security spending by perhaps $15 billion, pushing the projected 2003 deficit to around $80 billion.

        The projected federal budget surplus through 2011 has shrunk to $1.6 trillion, according to the nonpartisan Congressional Budget Office. And unemployment reached 5.8 percent last month, up from 4 percent a year earlier.

        Can the economy pull out of this dark hole of federal budget deficits, rising unemployment, a scandalous bankruptcy involving a five-letter word spelled E-n-r-o-n, and a stock market that seems in permanent hibernation?

        Yes, agree most economists, who say each business downturn inevitably leads to a rebound.

        “Recovery is pretty much assured as far as I'm concerned,” said Keitaro Matsudo, senior vice president for economic research at Union bank of California in San Francisco.

        But Federal Reserve Chairman Alan Greenspan told the Senate Budget Committee on Thursday, “It's very difficult to judge exactly how this year is going to develop.”

        “It's difficult to read the signals; it could go either way,” he said when asked whether Congress still needs to enact economic-stimulus legislation.

        Mr. Greenspan said the economy is “at a turning point” where businesses have nearly completed their liquidation of excess inventory and an economic pickup could be anticipated. How strong and quick it will be is too early to say.

        Other economists also are uncertain whether the economy will rebound in the first half of the year or later in 2002.

        Because both consumer spending and housing construction have held up well during this recession, neither will be in a position to contribute to a robust rebound, most experts agreed.

        “I think we are at the tail end of the recession and about to move into the transition to recovery, probably in the spring,” said Stuart Hoffmann, chief economist at PNC Financial Services Group. Even so, he added, “It will probably take until the second half of the year before the improvement is felt on Main Street.”

        Lynn Reaser, chief economist for Banc of America Capital Management in St. Louis, agreed that “economic indicators are beginning to look more favorable,” but added, “businesses remain quite cautious. Companies are still expressing reservations.”

        Among those who think the recession has not run its course is Don Schneider, president of Green Bay, Wis.-based Schneider National, which operates the nation's largest trucking fleet.

        Numerous bankruptcies in the trucking industry have put a glut of used heavy trucks on the market, reducing the price of a 3- to 4-year-old tractor from $50,000 or $60,000 to around $30,000. That's reduced the equity many carriers have to obtain loans for new trucks and hurt heavy-truck manufacturers.

        Heavy-truck sales fell by almost half between 1999 and 2001.

        A significant drop in sales of major capital goods, such as heavy trucks, telecommunications equipment, machine tools, semiconductors and computers, makes this recession different from its recent predecessors, said Tom Duesterberg, president of the Manufacturers Alliance for Productivity and Innovation.

        “Business investment is in the doldrums,” he said. “In the industrial sector it has been a severe recession.”

        Mr. Greenspan also highlighted what he described as “the retrenchment in capital spending over the past year,” describing it as “fierce and unrelenting.”

        But he offered an optimistic long-term forecast, pointing out that factory managers have said in recent surveys that “of the technology available to them, only about half has been put in place.”


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