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The national economic outlook.

Once again, 1990 proved to be a year when economic analysts and forecasters were unable to anticipate changing world events that distort expected patterns of economic growth. The "soft-landing" scenario, so frequently forecast for the U.S. economy for 1990, and the expectations for a quick return to positive economic growth in 1991 were incorrect. The Persian Gulf crisis, energy price hikes, declines in consumer confidence, renewed inflationary pressure, and a rising federal budget deficit contributed to the creation of an environment where the "soft-landing" scenario was proven to be too optimistic. In fact, the last half of 1990 was a period of general retrenchment and widespread economic slowdown.

Consequently, it should be of little surprise that the recessionary pressures of 1990 have carried over to 1991 and that the outlook for the year is much bleaker than was anticipated a year ago. In essence, the renewed growth expected in 1991 may occur but not as early nor as strong as predicted by earlier forecasts.

We entered 1991 with great uncertainty regarding the economic outlook for the year. With the invasion of Kuwait and the subsequent Persian Gulf war, short-term forecast models were sent into headlong retreat. Re long-anticipated economic recession has become a reality. Now, it seems evident that the recession's depth and length may be more serious than most forecasters initially envisioned. As a result, the Bureau expects 1991 to be a very slow growth year with weak performance for the first three quarters and only slightly more positive signs of an upswing by the fourth quarter of the year. A return to the moderately positive economic growth path experienced throughout most of the 1980s should reappear by early 1992.

Some of the issues that seem to be the most important determinants of the outlook for 1991 include the following:


Consensus Forecast: Rising oil prices and falling consumer confidence tripped the U.S. economy into recession probably beginning in October. The recession will be short and shallow with signs of recovery returning by the third quarter of 1991. For the year, real economic growth will fall a meager 0.1 percent.

Bureau Forecast Nationally, the slowdown probably began in july before the invasion of Kuwait) with the first negative quarter of growth during fourth quarter 1990. Moreover, there is a nagging probability that the recession will be more pronounced and prolonged than the consensus forecast suggests. Given a swift and peaceful resolution to the Persian Gulf crisis by early summer, there is a chance that the fourth quarter of 1991 could show a small positive gain. The first three quarters of 1991, however, are likely to experience a much sharper downturn than anticipated. The momentum of the downturn will most likely carry through to the fourth quarter, postponing any strong signs of recovery until early 1992.

What are the main reasons for anticipating a deeper and longer recession than the consensus forecast?

1. Growth in consumers'real income will be curtailed for most of 1991. The recession will likely slow the growth in interest income and dividend payments. Last year's savings cushion has quickly evaporated and, when coupled with rising unemployment, declining consumer confidence will mean that the economy will be hard pressed to generate the level of production and sales necessary to lift the nation out of this recession.

2. The global economy is in an oil-induced slowdown that will probably reduce the level of U.S. export growth. The recent collapse of the GATT trade talks over agricultural subsidies dampens the prospects for expanding global trade for the coming year. Economic and political uncertainties throughout the world, especially in the new eastern European nations and more recently the Soviet Union, will constrain export growth during 1991.

3. Despite the Federal Reserve's success at lowering short-term interest rates, long-term interest rates will probably remain stubbornly high for most of 1991. Financial markets are likely to by the Fed as an omen that inflation could return with a vengeance. While the discount rate, federal funds rate, and other short-term rates may drift downward, it is unlikely that they will stay down long enough to stimulate the economy during

4. The recession will likely cause the federal budget deficit to balloon during 1991, dampening confidence and keeping upward pressure on interest rates. In fact, federal borrowing needs could easily soak up what loanable funds are readily available, leaving the credit spigot to the private sector with only a trickle of available funds. This could force private-sector borrowers to pay higher rates to attract the funds necessary for plant expansions and equipment purchases.


Consensus Forecast Short-term interest rates are expected to drift lower during 1991,winding up 75 to 125 basis points below current levels. By the fourth quarter of 1991, the three-month Treasury bill will be in the 5.75 to 6.25 percent range, while the mortgage rate is likely to dip lower to the 8.0 to 8.5 percent range.

Bureau Forecast Short-term rates are not expected to drift much below 6.25 percent for most of 1991. Normally, the anticipated fall-off in demand for automobiles, housing, and business loans during a recession would be expected to quickly translate into lower interest rates. However, while falling short-term rates will garner most of the spotlight during the opening months of 1991, long-term rates can be expected to remain high. Long-term rate structures are slow to adjust in a market struggling with the burden of rising inflationary expectations and investment risk. A risk premium of 2.75 or 3.25 percent above the prevailing inflation trend would translate into long-term rates continuing to hover between the 8.75 to 9.25 percent range by year end.


Consensus Forecast The Consumer Price Index for 1991 is anticipated to advance at a 4.9 percent rate. A contracting economy and relatively stable oil prices are anticipated to keep the rate of inflation declining for most of the year.

Bureau Forecast: For the twelve months ending in November, the inflation rate advanced at a 6.3 percent pace, a much faster pace that's generally gone unnoticed. The so-called "core" rate (less food and energy), which is currently running slightly below the 5.0 percent mark, does appear to give some leeway for the Federal Reserve to increase monetary growth.

The inflation outlook is generally favorable for food, non-oil energy sources, and health services. Moderate wage increases, stable import prices, and lower prices on intermediate goods should help keep inflation from rising too rapidly during 1991. However, higher oil prices are generally expected to continue working their way through the price system during 1991 and should offset the downward pressure on prices due to rising unemployment and falling capacity utilization rates.

Improving productivity is one way to counter the effects of inflation and provide for real growth in the nation's standard of living. With the outlook for productivity improvements the worst in several years, the prospects for keeping inflation in check during 1991 will be harder to achieve than the consensus forecast anticipates. The inflation rate by year end should be 6.5 to 7.0 percent, approximately one-half percentage point above its 1990 level.


Consensus Forecast: The nation's unemployment rate will rise slowly during 1991, ending the year near 6.6 percent. Low inventory levels and the prospect of robust exports will keep production pipelines open, albeit at a lower operating rate. By early summer, the outlook for employment will improve as the economy shows signs of recovery, boosting business confidence and hiring plans.

Bureau Forecast: Because the severity of the 1990-91 recession should be much less than the 1980-82 recession, the unemployment rate will not rise to the double-digit levels experienced previously. The rate will likely rise to the 7.0 to 7.5 percent level by mid-1991, with regional and rural-urban differences becoming more pronounced at different times throughout the year. Clearly, worker dislocations and layoffs in durable goods manufacturing industries, especially automobile industries, will create havoc for many communities.

Weak construction activity and real estate markets will add to the difficulties experienced by both construction and financial services industries. Conservative practices newly instituted by the financial industry will inhibit any rapid recovery of the construction and real estate-dependent markets. These practices should offset a substantial portion of the expansionary impact of reduced interest rates and keep most local economies in the doldrums during 1991.

Retail trade and service industries, long the employment growth sectors of the economy, will stagnate during 1991 as consumer confidence levels and recessionary pressures constrain economic activity in these sectors. As a result, the unfavorable outlook for manufacturing and other sectors will cause 1991 to be a slower growth year for employment, leading to higher rates of unemployment than generally anticipated. Some counter-cyclical employment stimulus can be expected to come from the massive federal budget deficit and expanded monetary growth, but generally weak consumer spending will likely dampen expansion-driven employment growth for most of the year.

Finally, the prospects for robust employment growth during the second half of 19!)l will likely be constrained by generally weak capital investment, i.e., land, buildings, and equipment. With an outlook for lackluster profits, a burdensome debt load, and rising excess capacity, businesses will find themselves in one of the poorest investment environments in several years.

The buoyant self-confidence that propelled business investment over the past few years will most likely be replaced by a sense of cautious skepticism.
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Title Annotation:U.S. economy in 1991
Author:Gnuschke, John; Alvarado, Lew
Publication:Business Perspectives
Date:Dec 22, 1990
Previous Article:Communications networks for managing global operations.
Next Article:The Bureau's business advisory for 1991.

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