Sluggish Economy May Be Headed for New Recession
Editor's Note: Enron mentioned again! Two mainstream mentions in one day is unprecedented lately. - wrpBy Jeannine Aversa
Thursday 27 March 2003
The economy that turned sluggish at the end of last year isn't doing much better now - and may well be doing worse - as war uncertainties and the stagnant job market make consumers and businesses more cautious. Some analysts worry about a slide back into recession.
Since the 2001 recession, the economy has tried, unsuccessfully so far, to get back to full throttle.
Optimistic analysts believe the economy in the current January-March quarter has grown at a below-normal annual rate of around 1.5 percent to just over 2 percent. More pessimistic economists are suggesting growth of under a 1 percent rate, and some believe the first quarter could show the economy shrank, a step toward recession.
"I don't think anybody really wants to make significant financial commitments in view of the jobless recovery, the geopolitical situation and higher energy prices, which are eating into purchasing power," said Sung Won Sohn, chief economist at Wells Fargo.
The broadest measure of economic health - gross domestic product - slowed from a decent 4 percent annual growth rate in the third quarter of 2002 to 1.4 percent in the final quarter, the Commerce Department reported Thursday.
That final quarterly estimate was unchanged from a month ago. GDP measures the total value of goods and services produced within the United States.
While Sohn believes the economy will grow at a lackluster 2 percent rate in the first quarter, Carl Tannenbaum, chief economist at LaSalle Bank is more bearish, forecasting 0.5 percent growth rate. "The chance of having a negative first quarter is very real," he said.
The government will release its initial estimate of first-quarter GDP on April 25.
In a second report Thursday, new claims for unemployment benefits last week fell by a seasonally adjusted 25,000 to 402,000, a two-month low, the Labor Department said. Even with the drop, claims are at a level suggesting the job market remains sluggish.
Since the end of 2001, economic growth has been jagged, with a three-month period of strength followed by a quarter of weakness.
That muddled climate - along with concerns about the war, higher oil prices and a turbulent stock market - has made businesses reluctant to make major financial commitments, namely capital investment and hiring. That is the biggest factor restraining the economy's recovery.
Although businesses largely have restrained spending, consumers have been the main force keeping the economy going.
But recent economic reports show consumers are becoming more cautious, especially as the job market has worsened. The unemployment rate rose to 5.8 percent in February as the economy lost a whopping 308,000 jobs.
Economists believe the jobless rate moved up to 6 percent in March and may creep higher in coming months. The employment report for March will be released next week.
In fourth quarter of 2002, consumer spending grew at a rate of just 1.7 percent, a sharp pullback from the 4.2 percent rate in the third quarter. Some economists believe consumer spending in the first quarter may have slowed further.
"Higher energy prices are basically picking the pockets of consumers," said Stuart Hoffman, chief economist at PNC Financial Services Group.
Given all the uncertainty because of the war with Iraq, Federal Reserve policy-makers last week held interest rates steady at 1.25 percent, a 41-year low. They said they would closely monitor economic developments as the war unfolds. Economists said the Fed will not hesitate to cut rates if the economy shows danger signals.
To energize the economy, President Bush has called for $726 billion in tax cuts through 2013. The Republican-controlled Senate, however, approved a budget for next year that would limit the tax reductions to $350 billion. The House passed the full amount asked by the president.
The GDP report said that after-tax profits of U.S. corporations grew at a 4.1 percent rate in the fourth quarter of last year, compared with 2.1 percent in the third quarter. But for all of 2002, after-tax profits fell by 4 percent, on top of a 10 percent drop in 2001.
The sluggish profit environment is another reason why companies have been slow to make big hiring and capital spending commitments, economists said.
"The economy is growing at a snail's pace, and the greater concern is that it could slip into recession," said Richard Yamarone, economist with Argus Research Corp. "Even if the economy avoids a technical recession - two consecutive quarters of negative GDP - it will certainly feel like one."
War Threatens Economic Recovery, I.M.F. Says
By Timothy L. O'Brien
New York Times
Thursday 27 March 2003
Financial uncertainties related to the Iraqi war threaten to stymie a nascent global economic recovery, the International Monetary Fund said in a semiannual report released today.
Horst Koehler, the I.M.F.'s managing director, also told the German magazine WirtschaftsWoche in an interview published today that "a global economic recession cannot be ruled out" if the Iraqi war proves to be a prolonged engagement.
The I.M.F., a Washington-based agency that advises its 194 member countries on monetary policy and is a lender of last resort for developing economies, noted in its report that international financial markets were less risky than they were about six months ago. But it tempered this view with a warning.
"Normally, this would suggest the potential for a rebound in the economy and financial markets once investor sentiment turns," the report said. "However, this potential is currently overshadowed by the intensified uncertainty about the prospect of war in Iraq and its repercussions on growth and stability."
Specifically, the I.M.F. cautioned that the Iraqi war might lead to higher oil prices, anemic economic growth and depressed investor and consumer confidence, all combining to "reinforce the headwind against global economic recovery."
Some businesses say they have already begun to feel the impact of the Iraqi war and weaker consumer confidence.
"We are seeing reticence on the part of customers," Peter Hartz, a member of Volkswagen's board of management, said today in a written statement. "We're going to be facing some difficult times."
Global financial markets have seesawed in the last week, rising at first on initial expectations that the American-led invasion of Iraq would lead to a quick victory and diminish uncertainty about oil supplies. Then, as coalition forces became bogged down in sandstorms and met resistance from Iraqi soldiers, stock markets in the United States and Europe sank on the growing belief that the war would last much longer than initially anticipated.
On Wall Street today, stocks were little changed in afternoon trading; the Dow Jones industrial average was down 5.68 points, or 0.07 percent, at 8,224.20.
Overseas, Britain's FTSE closed down 64 points, or 1.7 percent, to 3,729.10; Hong Kong's Hang Seng fell 174.77 points, or 1.93 percent, to 8,872.32; and Germany's DAX rose 4.72 points, or 0.18 percent, to 2,584.05.
"While markets may have priced in a short and decisive war, any departure from this scenario could weaken confidence further," the I.M.F. said in its Global Financial Stability Report. "Moreover, markets may have not yet focused on the possibility that uncertainty could persist for some time.
"Uncertainty could also persist despite a short and decisive military conflict owing to the potential for continued geopolitical instability and tangible threats of terrorism," the report added.
Prior to the Iraqi war, the United States economy was already showing signs of slowing from levels reached last fall. The Commerce Department said today that real gross domestic product the output of goods and services produced by labor and property located in the United States rose at a revised annual rate of 1.4 percent in the fourth quarter of 2002. Real G.D.P. in the United States rose by 4 percent in the third quarter.
The I.M.F. said that a weakened dollar, which has fallen in value by about 20 percent against the euro over the last year, poses a threat if it falls precipitously in coming months. A weak dollar makes United States exports less expensive, threatening export-driven economies elsewhere in the world that rely on selling competing products.
Europe's insurance industry, as well as German and Japanese banks, received special attention in the I.M.F. report. The agency said all three sectors needed to address fundamental weaknesses in their structures. Europe's insurers need to be more effectively regulated and policed for risk management practices, Japanese banks need to address a lingering bad debt problem, and German banks need to consolidate, the report advised.
In emerging markets, countries like Brazil and Turkey face difficulty accessing funds in a weakened global economy, the I.M.F. noted, raising the specter of inflation and large debt defaults.
At the consumer level, the I.M.F. said that defined-benefit pensions in the United States, Britain, the Netherlands and Japan were "experiencing sizable funding gaps" because of corporations' overdependence on asset gains tied to the once-booming stock market of the 1990's. Not only will this affect retirees, but it will also dampen corporate profits in the future as companies are required to divert larger sums into pension funds to close funding gaps.
"Subject to geopolitical developments, the improvement of confidence could best be achieved through continued sound macroeconomic policies and a flexible response to renewed signs of an economic downturn," the I.M.F. advised in its report, taking note of repeated corporate scandals at United States companies like Enron. "It will also require the consistent implementation of steps to address the deficiencies in corporate governance, financial market practices and accounting standards, which were starkly revealed with the bursting of the asset price bubble."
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