Bank Economist Sees Better Times

June 16, 2003
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CHICAGO — In a mid-year review published last week, the chief economist and director of economics for Bank One says the long wait for the recovery may be at an end — and that the recovery actually may be underway.

In an article entitled "Gaining Traction," Diane Swonk predicts, "The second half will surely look better than the first, and the risks are rising that will blow the top off the economy in 2004.

But she and her staff — reporting in One View, the bank's monthly newsletter — also indicate that the recovery will proceed at a more stately pace in the Great Lakes states than in the rest of the nation.

The newsletter forecasts that the Great Lakes Index will have risen 1.8 percent in the second quarter, slightly behind growth for the nation. That lag, the newsletter said, is attributed to a slowdown in the production of vehicles.

Swonk, who earned her bachelor's and master's degrees with honors from the University of Michigan, noted that if production slowed, vehicle sales actually picked up in April and last month, after a slump in the first quarter.

She said this is one of the indicators that make the second half of the year look rosier than the first.

The other major bits of economic evidence to which Swonk pointed were:

  • The housing market remains strong, "with corrected census figures suggesting there is even more fundamental support from demographics than originally thought," amounting to three million more households to be created this year than originally estimated.
  • Home remodeling continues to pack the parking lots at stores such as Lowe's and Home Depot.
  • Ticket sale revenues for movie theaters have been surging, perhaps spurred by persistent cold weather.
  • Retail sales appear to be rebounding, apparently despite persistent cold weather.
  • Reductions in terrorism fears and fare reductions engendered by those fears have spurred tourism
  • Mortgage refinancing has set another record that, in turn, sets the stage for increased consumer spending in the future.
  • Narrowed risk premiums in the corporate bond market are spurring corporations to restructure their balance sheets to free cash flow for investments.
  • And that cash availability, combined with increasing obsolescence, is starting to boost equipment spending. Meanwhile, recent data show that spending on computers and software picked up during April.

Swonk also noted the Institute for Supply Management reported that "we may have hit a turning point in manufacturing activity in May."

If one combines those indicators, Swonk said, with what promises to be gains in government spending and retroactive tax cuts, it's difficult to bet against a strong third and fourth quarter.

But in the near term, she cautioned, none of this good news necessarily means that economic growth will translate into growth in the numbers of jobs.

In fact, she wrote, risks to economic growth still exist.

"Uncertainties abound," she indicated. "The rally in equity markets could be derailed by renewed geopolitical uncertainties or a failure of companies to perform as expected."

If last week's firing of the president of Freddie Mac, or the departure, under a cloud, of his two top subordinates constitutes an uncertainty, One View was silent about it.

What are uncertainties, according to One View, are the absence of progress in diplomatic talks with a self-proclaimed nuclear North Korea, and the hostility of some key Washington players to the government of Iran.

The players in question, One View said, are Secretary of Defense Donald Rumsfeld and his deputy Paul Wolfowitz.

Both are former members of a conservative think tank, which, before the Bush administration, regarded Iran as having progressed in nuclear weapons development much beyond Iraq.

Speaking of Iraq, Swonk wrote that the United States appears to be emerging from the Iraq war in much stronger economic shape than was the case in the wake of Desert Storm.

She said postwar data on the economy won't be available until later in this month. But even at that, Swonk said, "Consumer and corporate balance sheets are in better shape than they were in 1991," she wrote, "while monetary and fiscal policy are stimulative instead of restrictive."

She pointed out, too, that recently Alan Greenspan has expressed himself more optimistically, having said from Europe that though the U.S. economy showed signs of deterioration in March and April, it has stabilized since then.

"He also argued that a more significant recovery could be in the making," Swonk wrote, "although the timing of such a recovery remains uncertain."

In Swonk's view, the delay in the economy's recovery stems from several causes related to the war in Iraq:

  • Higher energy prices, attributed to pre-war uncertainty "which took a substantial toll on growth."
  • Payrolls slashed as reservists were called to active duty.
  • Equity markets that sustained added losses due to uncertainty about the war.
  • Worries about the war's outcome that caused general paralysis among businesses and consumers.

She indicated that media hysteria concerning the spread of SARS also helped delay the economy's expansion.

"One could safely argue that at least a percentage point of growth was lost to the war with Iraq and its surrounding uncertainties," Swonk wrote. "Real GDP should have been closer to 3 percent and 2 percent during the first half of the year."

Swonk is a senior vice president for Bank One Corp. in Chicago, having started her career with First Chicago Corp. in 1985. She quickly moved up the ranks, proving herself as a regional economist with her forecast for a renaissance in the industrial Midwest just one year later. Her first book, "The Passionate Economist: Finding the Power and Humanity Behind the Numbers" is about to be published.

She serves as a clinical professor for DePaul University's highly rated evening-MBA program. She also is an honors graduate of the University of Chicago where she earned her MBA in finance and strategic planning.

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