Balanced Economic Growth Seen

January 13, 2003
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GRAND RAPIDS — U.S. consumers simply can't carry the economy any longer; corporate America has to pick up the ball if the U.S. economy is to make a more solid recovery in 2003.

The economic outlook is for consumer spending to slow this year, for capital spending to come back and for the economy to regain its balance.

So said Bank One Chief Economist Diane Swonk in an address to members of the Economic Club of Grand Rapids at the Amway Grand Plaza last week.

The Sept. 11 tragedy, corporate malfeasance, and the uncertainty of a war with Iraq have affected the corporate sector's ability to move forward and caused some reluctance about investing in new equipment and technology, she said.

The resilience of U.S. consumers has kept the economy afloat through recession thus far, but can they keep it up?

"They've been at this for a long time; they're a little tired," Swonk said. "It's time for the corporate sector to come on in and pick up the slack. In the corporate sector cash flow, though low, has turned. Profits, though low, have turned."

With corporate cash flow and profits improving, stock repurchases, debt repayments and equipment spending are likely to increase.

"We've started to see corporate buy-backs of stocks surge; we've seen repayment of debt pick up dramatically."

Swonk believes capital spending — the real investment in the future — will come back in 2003.

Equipment replacement demand is already starting to add some fuel to the economy and is expected to increase during the year as businesses began replacing computers purchased in 1998 to 1999 to handle Y2K, Swonk noted.

The most persistent problem is trade. The world still looks to the United States to support it, which Swonk said will translate into chronic trade deficits going forward.

"We've got this trade problem, but we have an economy that is resilient, and its recovery should lead to a more stable, more solid expansion in 2003."

Swonk expects the Federal Reserve will gradually began normalizing interest rates later this year, moving the federal fund rate up from its current historical low of 1.25 percent to about 4 percent by the end of 2004.

What U.S. consumers have going for them is historically low unemployment, even with recent increases.

And they have enjoyed the two longest and largest mortgage refinancing runs in history, leaving them with more access to credit and greater ability to handle debt. They also have a wide variety of cut-rate financing available for big-ticket purchases from cars to furnishings.

President Bush's proposed $674 billion economic stimulus plan unveiled last Tuesday would put more money in the pipeline over the next 10 years and further the incentive to spend.

But on the downside, the U.S. consumer faces another "jobless recovery" with weak gains in employment and quickly escalating health care costs that could eat up more disposable income.

Swonk anticipates an equity rebound.

The S&P 500 was still about 20 percent undervalued as of Monday, and coupled with estimates for a profit recovery this year, that suggests a "significant upside" for equities.

She warned that the biggest threat to the economic outlook is uncertainty.

A quick resolution to the U.S.'s problems with Iraq could stimulate better than anticipated growth to feed the economy.

On the other hand, the war on terrorism, a war with Iraq, or further incidents of terrorist attacks on U.S. soil — individually or in combination — could increase the instability of U.S. financial markets, which in turn could cause U.S. consumers to retreat and drive the economy into an even worse recession than that of 2001.

However, a war with Iraq wouldn't affect the U.S. economy the same as the Persian Gulf War did in the early 1990s, because the economy is fundamentally stronger and better equipped to deal with economic risks than it was 12 years ago, Swonk said.

If there is to be a war with Iraq, the trigger will probably be a scientist, she predicted, because the only way to ensure against Iraq's ability to build weapons of mass destruction is to take away its scientific brainpower.

"They would have to give up their scientists. They won't ultimately give up their scientific knowledge. That will be the trigger point for violating UN sanctions.

"The stability of the world over the next several years is not guaranteed."           

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