Fed Official Sees Slow Increase in ’03 Growth
The U.S. economy will experience moderate growth by year’s end, but no sharp postwar rebound, the president of the Federal Reserve Bank of Philadelphia predicted Sunday.
Anthony M. Santomero expects the economy to be growing at a 3% to 4% annual rate by the end of the year and into 2004 as businesses start to fill depleted inventories and rehire workers.
But he warned that it was too soon to declare a full-fledged end to the economy’s woes, in part because political uncertainties still pose a challenge to longer-term business plans and hiring decisions.
“As the international issues recede from the foreground, the U.S. economy will gradually improve its performance,” said Santomero, delivering his annual forecast at the American Truck Dealers convention.
Even as the economy recovers, he added, the unemployment rate may continue to climb because it will take time for a pickup in consumer demand to generate a consistent need for businesses to hire new workers.
“The war has cast a long shadow over our economy,” Santomero said. “Even if our anxieties about global developments have been eased, this does not mean the economy will suddenly bounce back.”
The forecast came after a report Friday showed a startling jump in March retail sales, leading most Wall Street economists to abandon hopes for an interest-rate cut before the Fed’s next meeting in May.
Santomero said businesses will expand only cautiously, given the slumping stock market, the continuing threat of terrorism, and recent accounting and corporate scandals.
“This is hardly the kind of environment that invites commitment to an expansion program,” Santomero said. “Considering the broad range of risks before us, I believe that businesses will commit only gradually.”
Weekly and monthly economic data will be especially important in coming weeks to indicate how people are reacting to developments in the Persian Gulf, Santomero said. But he added not to look for the economy to take off when the fighting in Iraq ends.
“This economic recovery has been losing momentum since last summer. Not all of this can be laid at the feet of the Iraq situation,” said Santomero, who also called the economy “resilient.”
As the situation in Iraq is resolved, he said, consumer and business spending will resume and allow a more robust economic expansion to take hold.
Cuts in business spending have continued to drag down the current business cycle, leading to low inventories and employment levels. The slowdown persists despite strong consumer spending in housing and other durable goods, fueled by interest rate cuts and pent-up demand, he said.
Business spending on security, given the geopolitical climate, is another impediment to growth, as the spending generally does not boost productivity, Santomero added.
