Economy Reviving Without Congress’ Help
So nearly 8 million people out of work were not enough to make members of Congress unite on a stimulus package to lift the economy out of recession. Instead, Congress fell to political squabbling, failed to pass legislation and then left for Christmas vacation.
Such indolence could come back to haunt the politicians but,
surprisingly, it won’t hurt the economy. That’s because economic recovery is picking up on its own, economists say, and the early months of 2002 will see better-than-expected business activity.
Auto production, for example, will be higher in early 2002 because the interest-free financing offered by American and some foreign auto makers in 2001 boosted vehicle sales so much that dealer inventories are depleted. “Now those inventories will be replenished and that will keep people at work and factories humming,” says Diane Swonk, chief economist of Chicago-based Bank One.
Cash is fueling the economy’s recovery. The Federal Reserve has lowered interest rates and increased money available to business by almost $1 trillion in the last year, economists estimate.
And though Congress didn’t pass a formal economic stimulus package, it has pumped at least
$20 billion of emergency relief into the economy since the Sept. 11 terrorist attacks.
But mortgage refinancing has been the largest cash factor lifting the economy. More than $1 trillion worth of mortgages have been refinanced at a lower interest rate in 2001, with the pace accelerating after Sept. 11.
With long-term interest rates falling, homeowners saw opportunities to change their old mortgage for new ones. The lower monthly payments in turn allowed them to spend on other things, pay off debt or put money into savings. Evidence in recent months shows
the consumer doing all three--reducing credit card debt, saving slightly more and spending more than had been anticipated.
Yet unemployment is likely to continue rising in the new year, reaching perhaps 6.5% of the work force--or almost 9 million people out of work.
Economists explain that unemployment normally rises even as an economy recovers from a brief recession. That’s especially true at this time because U.S. industry, which saw a $125-billion, or 15%, decline in corporate profits in 2001, is on a binge of restructuring and laying off workers. Ford Motor Co., for example, recently announced layoffs of 5,600 workers; Motorola Inc. announced 9,400 layoffs last week.
If layoffs keep showing up in January, as is likely, members of Congress who voted against stimulus will be embarrassed and perhaps will pass some aid for the unemployed and tax cuts for businesses.
The view of most economists, however, is that a lack of legislated stimulus won’t matter. Swonk sees the economy accelerating gradually next year to a 5% growth rate by the end of the year, a comparatively weak recovery. Economist Stephen Roach of Morgan Stanley puts growth at less than 2% in 2002.
Still, most forecasts don’t get the economy precisely right. What the average person and investor should watch for in the new year are signs of both recovery and of risk to specific industries.
Energy will be in the news as usual. Oil and natural gas prices right now are almost 25% below what they were a year ago. That’s a gift to consumers and it spells lower inflation throughout the economy.
On the other hand, a hangover from the collapse of Enron Corp. is brewing--lenders and capital markets are raising interest rates on loans to electricity companies. That’s why Mirant Corp., Calpine Corp. and other independent generators have had to reduce debts on their balance sheets and cut back on plans to build power plants.
Ultimately, higher interest costs for electricity companies will lead to higher prices for electricity in many parts of the U.S.
It was a sharp reduction in business investment in computing and communications technology that caused the recession this year. And experts are still debating when the pace of technology investment will pick up again.
But the major deal announced last week in which Comcast Corp. will acquire AT&T; Corp.’s cable business for $52 billion could spark a new round of major investments by cable and telephone companies, experts say.
The prospect of Comcast’s cables bringing broadband services, including Internet telephone service, to 22 million homes raises the specter of real competition for the Bell telephone companies--Verizon Communications, SBC Communications, BellSouth Corp. and others. “And that could force the Bells to invest in improving their connections and services to customers,” says Peter Bernstein, head of Infonautics Consulting, a telecommunications research firm based in Ramsey, N.J.
The war on terrorism will continue to affect defense spending. Specifics on the future direction of defense spending will be made clear in President Bush’s State of the Union message in January, experts say.
Meanwhile, the Southern California economy will benefit from higher spending on military and space technology. But the region also will continue to suffer job losses from the downturn in commercial aircraft production by Boeing Co. and Airbus, notes Jon Kutler, head of Quarterdeck Investment Partners, a Santa Monica-based investment firm. Many of Southern California’s small to medium-size manufacturing firms are suppliers to Airbus and Boeing.
Elsewhere, the Southern California economy has fared relatively well in the recession. The entertainment business has enjoyed robust box office but also a sharp drop in advertising revenues for television.
The region’s biggest job-creating industry, foreign trade, has seen the volume of goods moving through the ports of Los Angeles and Long Beach increase modestly this year. There is concern, however, about a drop-off in high-value goods through the region’s airports and how soon that cargo will pick up again.
Nonetheless, real estate in Southern California will remain strong in both residential and commercial markets, reports Dominic Ng, president of San Marino-based East West Bank. That’s because of lower interest rates and availability of cash in the economy.
The hope as a recessionary year ends is that low interest rates and abundant cash in the hands of corporations and consumers will hasten fresh investment in U.S. industry and revive the economy. Undoubtedly that revival will happen, although how soon is hard to precisely predict.
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James Flanigan can be reached at jim.flanigan@latimes.com
