Bank Economist Sees A Rosy Outlook

June 17, 2002
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CHICAGO — The chief economist of Bank One Corp. reported last week that the economy of the United States is facing some long-term structural changes that auger well for the future.

Writing in the firm's publication, One View, Diane Swonk says she believes the coming changes are good because they have positive implications for productivity growth, profits and equity market returns.

She notes that upward revisions of profits in recent weeks have hit a record high. She predicts, too, that growth in the second quarter will be significantly more balanced than it was during the first quarter.

She argues that the recent weaknesses in equity markets appear to be created by the uncertainties surrounding not only the war on terrorism, but also the run-out of the Enron debacle and the ripples it has caused. And the weakness, she added, is grossly out of line with the economy's current fundamentals.

"Consumers remain alive and well," Swonk wrote, "but they are not spending at quite the pace we saw in the first quarter."

She also said the numbers show that equipment investment appears to be coming back to its old pace, "with recent orders (being) particularly strong."

Swonk believes that real gross domestic product will grow 2.6 percent in the second quarter, about half the pace of the first quarter. Later in the year, she believes that GDP will accelerate to just above 4 percent.

"The 'wait-and-see' Fed is in no hurry to raise rates in the near term," she indicated, "but may begin to move by the end of the year.

"Then moves are expected to be aggressive," she added, "in 50 basis point increments."

While she said that several trends will play out to bolster the economy over the next several years, Swonk expressed several caveats.

"Not only are we starting from a lower unemployment base — which means that tight labor market conditions will be achieved much sooner — but the war on terrorism and a complete loss of fiscal discipline suggest that real interest rates will be rising.

"When those factors are added to the prospects for persistently higher structural current account deficits, another sharp depreciation in the dollar cannot be ruled out medium term."

Swonk is a senior vice president for Bank One and a clinical professor for DePaul University's Master of Business Adminstration program.

She forecast the industrial Midwest renaissance, designed the Bank's regional model, and has published several nationally acclaimed studies. She also currently manages the bank's corporate economics group.

Her comments in One View come in the wake of an upbeat statement in October of last year.

At the time, she noted that GDP figures showed a recession had begun.

But, the University of Chicago graduate added, "the good news is that there is a light at the end of the tunnel, and it is brighter than anyone could have imagined prior to Sept. 11.

"And that is due to increased monetary and fiscal stimulus. Finally, I'd note that other economies have transitioned and learned to expand in the face of terrorism, most notably the UK and Israel, and there's no reason to believe the most flexible and adaptable economy on earth can't do the same."

Following, her article indicated, are some of the key structural changes businesses should be watching:

  • Capital markets continue to gain efficiencies in a flexible market economy.

  • The return of chronic national deficiencies in savings rooted in trade and federal budget deficits.

  • Technologic advances in biochemistry are transforming research into applied health care.

  • The end is coming in mortgage refinancing as a major vehicle to restructure consumer balance sheets and to tap the wealth in housing.

  • A fundamental monetary policy change with the Fed — inflation being low — focused not on baseline forecasts to conduct policy, but to manage the downside risk of inflation.

  • Continued technologic innovation in information processing and communications.

  • Creation and maintenance of a common currency in Europe is forcing redistribution of capital and jobs and restructuring of post-War entitlements.

  • The accelerated aging of the population.

  • The dismantling of the post-war design of the Japanese economic that discouraged consumption and enhanced savings.

  • In the wake of communism's collapse, increased economic integration of market economies is increasing.

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