Monday, July 08, 2002

Half empty?


Despite barrage of bad news, economic outlook still bright for second half

By MARTIN CRUTSINGER
AP Economics Writer

        WASHINGTON — On Wall Street, investors are suffering through another round of corporate accounting scandals and stock market blues. On Main Street, things may be looking up.

        Private economists are predicting solid growth for the second half of this year after a roller coaster opening six months.

        The optimism is based on a belief that consumers, bolstered by low mortgage rates and interest-free auto financing, will keep spending, especially if forecasts of a declining jobless rate come true.

        It is a view at odds with all the recent gloom in financial markets.

        Another turbulent week saw the Dow Jones industrial average plunge briefly below the 9,000-point mark only to close with a 324-point rally.

        The technology-heavy Nasdaq index and the Standard & Poor's 500-stock index both dropped below the lows they had hit immediately following the Sept. 11 attacks.

        The market weakness reflects continued fallout from the latest corporate accounting scandal, this time at the country's second largest long distance telephone company. WorldCom announced it was eliminating 17,000 jobs.

        “Instead of overdosing on euphoria, investors now are in the grips of despair, pessimism and mistrust that is being fueled from all the accounting troubles,” said David Jones, chief economist at Aubrey G. Lanston & Co. in New York. “This is an unwinding of all the excesses that went into the high-tech bubble.”

        The investor worries have not been helped by the numerous government warnings of terrorist attacks, which sent consumer confidence skidding to a four-month low in June.

        “We need to separate economic fundamentals from this crisis in confidence,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. “The economy is fundamentally sound.”

        Sohn and other analysts are convinced that last year's recession is over, probably ending this January or February. The National Bureau of Economic Research, the official arbiters, is waiting to pinpoint the month.

        Analysts see little danger of a “double dip” recession in which growth slips back into negative territory

        The gross domestic product — the economy's total output — raced ahead at an annual rate of 6.1 percent in the first quarter. Analysts believe it grew by a more sedate 2.5 percent rate in the April-June quarter.

        Still, averaged together, the GDP was growing in the first half of this year at a none-too-shabby 4 percent-plus rate. Economists believe growth in the second half will be a tad below that level, helped out by a variety of factors.

        Along with low interest rates bolstering consumer spending, there should be more workers drawing pay checks as companies finally start rehiring to meet rising demand. Unemployment, which typically rises in the early months of a recovery, hit 5.9 percent in June.

        Analysts are predicting it will top out around 6.3 percent in late summer or early fall, before starting a sustained improvement. That would be far below the 7.8 percent jobless rate recorded as a result of the 1990-91 recession.

        Oregon and Washington, hurt by the high-tech decline, continue to have the highest unemployment rates, more than a percentage point above the national average. State data lag behind the national figures.

        Analysts believe the Federal Reserve, which has done its part to bolster demand by keeping interest rates at a 40-year low, will not start raising rates until the unemployment rate peaks and begins to come down.

        With the consumer hanging in, analysts believe corporations will finally start spending again on new factories and equipment. A rebound in business investment is so far the missing piece in the recovery story.

        When business spending does pick up, bolstered by stronger profits, analysts believe everything will be in place to guarantee growth rates of around 3.5 percent in the third and fourth quarters this year and even better quarterly GDP rates topping 4 percent next year.

        “After the biggest stock market bubble in our history burst and after the Sept. 11 terrorist attacks, the U.S. economy has proven remarkably resilient,” said Diane Swonk, chief economist at Bank One in Chicago.

       



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