'DOUBLE-DIP' RECESSION UNLIKELY: CONTINENTAL BANK ECONOMIST
CHICAGO, Nov. 26 /PRNewswire/ -- Falling consumer confidence and the threat of a strong stock market correction have increased concerns about the economic outlook, said Richard S. Peterson, chief economist, Continental Bank (NYSE: CBK). "There is little doubt that the spark required to generate additional strength in economic activity remains elusive," he said. So, economic growth in the next year will be slower than in previous recoveries.
Despite reports that economic activity has slowed in the past few months, the possibility of a "double-dip" recession remain relatively remote, according to CONTINENTAL COMMENT, Continental's bi-monthly customer newsletter that analyzes economic and interest-rate trends. A number of indicators suggest that growth remains stronger than at this time last year:
-- During the second half of 1990, both nonfarm employment and real after-tax income declined sharply, but in the past few months both have grown.
-- Housing starts last year were dropping, but in the past six months they have risen close to 15 percent.
-- New orders for durable goods, while fluctuating during the third quarter, are sharply higher than earlier in the year, so further cuts in business inventories are not likely to be necessary.
Other factors are reasonably positive. "Inflation fears currently are relatively mild," according to CONTINENTAL COMMENT. As a result, the Fed is willing to act more aggressively to reduce interest rates.
"Much has been made of the sharp fall in consumer confidence," Peterson said, "but this doesn't square with the fact that spending has outpaced income this year. More important are low levels of business confidence as reflected in employment cutbacks, the lack of inventory building, and reluctance to increase capital spending. It is likely, however, that business confidence will begin to improve with renewed activity in the business sector.
"Foreign trade and business investment will both improve in coming months," Peterson added. "Exports continued to rise in the third quarter after a sharp increase in the second quarter, and further gains are expected in the months ahead. Despite surveys that show declining business confidence and cutbacks in capital spending plans, business investment is beginning to show a modest recovery."
Consumers should be able to increase spending at a faster rate in 1992, but the rise in consumer spending is likely to be modest compared with earlier recoveries.
Housing starts in 1992 are expected to increase to 1.13 million units, still the second lowest level since 1982. Auto sales should approach 9.5 million units by mid-1992, but will be anemic compared with previous years.
"Even with continued gains in exports and investment, real GNP, which showed virtually no gain in 1991, is expected to rise by about 3 percent in 1992," Peterson said in CONTINENTAL COMMENT. "As a result, the expansion will continue at less than half the rate of increase in previous recoveries."
OTHER KEY ECONOMIC INDICATORS
MANUFACTURING PRODUCTION will increase by an estimated 4 percent in
1992, up from an estimated increase of 0.4 percent in 1991. In
1990, manufacturing production was up 0.3 percent over the previous
NONFARM EMPLOYMENT, down an estimated 0.7 percent in 1991, will
increase by an estimated 1.4 percent in 1992. Nonfarm employment
increased by 0.7 percent in 1990.
INTEREST RATES are likely to continue to decline over the short
term, but rates across the maturity spectrum will increase next
year as fears of an economic relapse ease.
INFLATION is estimated to rise slightly more than 4 percent this
year, in part due to falling oil prices, close to the four to four-
and-a-half percent range of recent years.
/CONTACT: William C. Murschel, 312-923-5130, Lisa M. Hewitt, 312-923-5166 or Edgar P. McDougal, 312-923-5200, all of Continental Bank/
(CBK) CO: Continental Bank ST: Illinois IN: FIN SU: ECO SH -- NY056 -- 7357 11/26/91 13:51 EST