U.S. recovery may begin in spring

By SHIHOKO GOTO, UPI Senior Business Correspondent  |  Nov. 30, 2001 at 8:00 PM
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WASHINGTON, Nov. 30 (UPI) -- Forecasting the economy is like predicting the weather. Rational science lurks behind the art, but with economic growth ultimately dependent on human labor, there are too many variables that could throw well-calculated projections out the window, not least terrorist attacks.

In fact, if Wall Street analysts get their projections about the economy on target at least half the time, they are considered exceptional, as even the better economists are often considered good by getting it right only one-third of the time.

That unreliability of economic forecasts hasn't stopped governments or investment banks from competing to come up with estimations of where the global economy is heading, and investor appetite for their latest analysis remains insatiable.

"We'll probably see about 18 more months of weakness (in global expansion)," Zurich Financial Services' chief global economist David Hale said at a Friday briefing. "The (U.S.) recession will persist for a while. But by next spring, we should see some recovery."

Hale, who told the 20 or so investors and reporters gathered for his presentation that he had met with the Federal Reserve's Vice Chairman Roger Ferguson earlier in the day, took a mainstream view shared by a larger number of economists from both the public and private sector, saying that there were a number of factors supporting the case for a recovery before the end of the first half of next year.

In particular, he pointed out that the Federal Reserve, which had been easing monetary policy aggressively since the beginning of the year, had stepped up its campaign to slash interest rates post-Sept. 11 as a means to keep the economy afloat.

"I would expect the Fed to cut rates again by another quarter-point or so," Hale said. The key federal funds target rate stands at 2 percent, its lowest level in 40 years. By bringing down the cost of money so aggressively, the central bank is creating incentives for both consumers and businesses to spend, he said.

Another bright spot for the economy is the economic stimulus package being debated in Congress. While there is a political deadlock on whether to encourage more corporate tax cuts or boost benefits to those directly hit by the economic slump, Hale argued that whatever measure is implemented would have a positive impact on economic expansion.

Moreover, the plunge in oil prices could help both companies and consumers alike by reducing energy costs, he added.

All that may be true, but the economic engine remains in a precarious state. The National Association of Business Economists, the nation's official arbiter of booms and busts, reported earlier this week that the U.S. economy has been in a recession since March, ending a decade of unprecedented expansion. Meanwhile, the U.S. Department of Commerce revised down its gross domestic product growth rate for the third quarter early Friday to minus 1.1 percent compared to a contraction of 0.4 percent reported a month ago.

At the same time, consumers are less willing to spend, given the rise in the jobless rate, with October's unemployment rate at 5.4 percent, which many expect will continue to rise close to 6 percent in coming months.

Hale acknowledged looming downside risks, including further possible acts of terrorism to dislocate the U.S. economy, as well as the pressure of a synchronized global recession with both Japan and Europe in the doldrums, too. He also noted that the cost of security and insurance policies due to fears of further strikes could weigh down on potential expansion.

Another negative factor for the U.S. economy could be the political vacuum on economic policy in the Bush administration. Hale said Treasury Secretary Paul O'Neill is "not trusted either overseas or at home, and has lost a lot of friends" even among Republicans, while White House economic adviser Lawrence Lindsey is "unable to pull together a committee meeting, let alone play politics." As for Office of Management and Budget Director Mitch Daniels, he "refuses to get involved on the policy side," Hale said.

In spite of such risks, Hale repeatedly said the U.S. economy remains fundamentally strong and should be able to weather the current downturn, which he said has already reached its bottom.

Only time will tell if indeed his predictions are more accurate than those of most economists.

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