ARCHIVE - December, 2001

On the State and Future of the National Economy
Richard Wobbekind, College of Business and Administration

The U.S. economy entered 2001 riding the longest expansion in history. However, a few short months into the year, the economy entered a mild recession. The National Bureau of Economic Research stated in November that the country had entered a recession beginning in March. Many factors were responsible for this economic downtown, including a sharp decline in the demand for Internet, telecommunications, and high-technology products and services; a surge in energy prices; and tight monetary policy. In the months that followed, the downturn extended to the suppliers of business services. The events of September 11 exacerbated the aforementioned problems, and industries such as transportation, retail, lodging, hospitality, and finance were dealt a heavy blow at this time.

For the past several years the consumer has been the savior of the U.S. economy. Consumers helped extend the economic expansion by continuing to purchase despite the signs of a weakening economy. The rise in market wealth of more than $10 trillion between 1994 and 2000 is frequently cited as a reason that consumer spending has remained stronger than expected over the past year. However, the $6 trillion decline during the past 18 months has translated into a drop in consumer spending and confidence. Consumer confidence began to fade in June, took a steep dive in September, and still has not recovered.

The slowing economy can be measured in the changes of the real Gross Domestic Product (GDP). The 4.2% growth rate recorded 2000 tailed off sharply to a growth rate of 1.1% in 2001. Economic forecasts for 2002 indicate a soft economy during the first half of the year and a strong recovery during the second half, with a resulting annualized real GDP growth rate of 1.0%. This slower GDP growth and the ripple effect of layoffs in mid to late 2001 will cause unemployment to increase from 4.7% this year to 5.8% in 2002.

This slower growth emanates from several areas. We anticipate personal consumption expenditures to grow at a slower rate due to higher unemployment, lower personal income growth, and the aforementioned reduced stock market wealth effect. We also expect a lower rate of business investment, with a majority of the investment coming in the later half of the year. Automobile sales and housing starts are expected to be weaker in 2002. Finally, our international trade position is not expected to improve until global economic conditions strengthen.

Longer-term the U.S. economic outlook improves significantly for three primary reasons. First, the monetary policy stimulus has been significant and will have a significant impact. Second, the fiscal stimulus of the summer (tax cut), fall (disaster and military expenditures), and winter (additional tax or spending legislation) will likely have a profound effect on the growth of the economy. Third, lower energy prices are estimated to be equivalent to a $300 per household tax cut. This combination should accelerate growth in 2003.

The optimistic scenario I am painting is not without concerns or caveats. Several plausible scenarios could extend and even deepen the U.S. recession: (1) there is another terrorist attack, (2) consumer confidence remains low and consumer purchasing continues to slow, and (3) the world economy remains sluggish or becomes recessionary.

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