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Consumer confidence, capital spending expected to stimulate economic growth.

There's an old adage which can be adopted for 1993 that reminds us that things are never as good as we hope, nor as bad as we imagine. The economy in 1993 is not expected to be as good as past recoveries but should be much better than it was in 1991 and 1992.

The new President's first one hundred days in office have clearly influenced business and consumer confidence. Officially, it is the second anniversary of the current economic recovery, and President Clinton's three-pronged attack on the deficit is timed perfectly to take advantage of the current period of economic expansion. The public's reaction to President Clinton's proposals for reduced federal spending combined with tax increases and redirected infrastructure investments will go a long way in setting the stage for the economic events of 1993 and 1994. Any major policy shifts in spending or taxes probably won't take effect until 1994, the third year of the current economic expansion. The President's campaign promise to cut the deficit in half by the end of his term will likely result in additional deficit reduction initiatives and make 1993 and 1994 a period of unusual economic uncertainty.

The spurts and false starts in economic activity over the past two years have kept a majority of analysts skeptical about the economy's ability to return to historical recovery rates. They are quick to point out that a return to such levels would require much higher employment and income growth than currently anticipated. On the other hand, the hope is that 1993 will set the stage for a return to more rapid economic growth through a combination of rising confidence, production, and income.

To a large extent, businesses and consumers are beginning to imagine a much brighter future while still guarded in their short-term outlook. Transferring this future optimism into current action will be the biggest challenge for the new administration and for the economy as a whole. If this challenge is not met, the economy will likely be mired in stagnant growth, high unemployment, and a falling standard of living well into 1994.

Economic Growth

Consensus Forecast: Growth will continue well below typical recovery rates with the rate advancing slightly above 3.0 percent by year's end. Defense cutbacks, lagging consumer incomes, and anemic growth overseas are the major constraints to achieving a higher growth trajectory. However, rising consumer confidence coupled with an upturn in capital spending should prove to be the needed stimulus to keep growth at 3.0 percent for 1993.

Bureau Forecast: Economic growth will be noticeably higher for 1993 than the consensus forecast suggests. Despite continued weakness in the commercial real estate and business construction sectors, the U.S. economy is poised for a progressively improving expansionary phase. While the economy can reasonably expect a fiscal stimulus package of approximately $31 billion from the new administration, the major engine for better-than-expected growth for 1993 will be the improving balance sheets of consumers and businesses. Business balance sheets are showing increased profitability, lower debt service, and rising stock prices. While consumers continue to whittle away at their debt overhang, their rising confidence has translated into increased spending, defying most forecasts of an impending retrenchment. With plenty of liquidity, a low interest rate, and a low inflation environment, economic growth will likely build momentum throughout 1993 and advance at a 3.6 percent rate, 0.6 percentage points higher than the consensus forecast.

Interest Rates

Consensus Forecast: Moderate growth will keep interest rates stable to slightly higher. With inflationary expectations subdued for the present, the only pressure to bid-up interest rates will likely come from the lack of a reasonable deficit reduction plan by the new administration. The three-month Treasury Bill will move up slightly to 3.5 percent, while Corporate AAA bonds will slowly rise to 8.0 percent, slightly above their early 1993 level.

Bureau Forecast: The prospects for rising short-term rates will most likely be tied to the strength and speed of economic growth throughout 1993. The faster-than-anticipated advance in economic growth will cause short-term rates to rise slowly to near 4.4 percent by year's end.

While financial markets are not necessarily looking for a short-term quick-fix to the deficit problem, they will be expecting a reasonably well-thought-out strategy for bringing the deficit down with as little pain as possible. Failure to achieve this goal will likely see long-term rates rise more than expected, possibly near 9.0 percent on Corporate AAA bonds by year's end. With a workable deficit reduction program, Corporate AAA bonds could fall to under 7.0 percent by year's end.


Consensus Forecast: One positive aspect of this slow-growth scenario is the downward pressure on prices. With oversupply in basic commodities and stable oil markets, the consensus forecast is for consumer prices to advance 3.1 percent, approximately the same as in 1991 and 1992. The new administration's emphasis on controlling health care costs will also help keep inflationary expectations from rising.

Bureau Forecast: With gold prices at a seven-year low, it is hard to imagine that market participants are concerned about rising prices or international conflicts. Renewed Persian Gulf hostilities and food relief efforts in Somalia are having little impact on commodity and stock market psychology. Additionally, medical care price increases have already slowed considerably from the rapid pace of the last two years. With the Federal Reserve unlikely to be overly expansive at this stage of the recovery, inflation will likely remain only slightly above the consensus forecast. Rising energy demand (from higher growth) and a weaker dollar (rising import prices) could cause inflation to advance to 3.7 percent for 1993.


Consensus Forecast: With job creation prospects the best in two years, the consensus forecast estimates only a modest decline in the unemployment rate to 7.0 percent for 1993. Continued labor cost-cutting by U.S. corporations and defense downsizing, coupled with an influx of previously discouraged workers, will keep labor markets full of job seekers. Corporations are also likely to use overtime and temporary workers to increase production before hiring any new workers, while sluggish growth in exports will dampen any robust gains in manufacturing employment.

Bureau Forecast: Better-than-expected export growth and consumer spending will boost employment prospects for 1993. The prospects for a boost in business capital spending and an upswing in spending on the nation's infrastructure will also add stimulus in creating jobs.

With initial claims for unemployment at their lowest level in years, any new employment programs coming out of Washington will have a much more positive impact.

With inventory levels under control, improving consumer demand will be quickly translated into increased production and hiring. The Bureau's slightly higher forecast for economic growth in 1993 will be translated into higher employment levels, lowering unemployment below the consensus forecast. For 1993, unemployment will fall to below 6.4 percent by December and average 6.6 percent for the year.

Dr. Gnuschke, professor of economics, is director of the Bureau of Business and Economic Research at Memphis State University. Mr. Alvarado is a research associate for the Bureau.
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Title Annotation:The 1993 Economic Outlook
Author:Gnuschke, John; Alvarado, Lew
Publication:Business Perspectives
Date:Dec 22, 1992
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