Friday, January 19, 2001

President Clinton is leaving George W. Bush an economy that, after achieving many records in strength and longevity, is rapidly weakening as it ends its 10th year of expansion.
Economic growth plummeted from a steamy 8.3 percent annual rate in the final quarter of 1999 the peak of the expansion to 2.2 percent last summer and appears to be slowing further.
Unemployment remains at a 30-year low of 4 percent, but job growth has slowed in the past year after the creation of nearly 24 million jobs since the beginning of the expansion in 1991.
Inflation hit a 10-year high of 3.4 percent last year but has stayed on average well below the high levels seen in previous decades. That enabled interest rates to stay low and led to a record homeownership rate of 67.7 percent.
The Dow Jones Industrial Average quadrupled in value by 2000 but last year fell 6 percent in its largest loss in a decade.
Consumer confidence soared to record levels but then plunged suddenly last month in the largest drop since the 1991 recession.
A flood of tax revenues from growing incomes and soaring stock gains turned federal budget deficits of more than $200 billion into record surpluses of equal size.
Plentiful jobs stoked a drop in the poverty rate to 11.8 percent, its lowest level in two decades, which helped cut welfare rolls in half and contributed to falling crime rates.
While no one can predict exactly what will happen, some economists wonder if the remarkable expansion will eke out a full decade of growth. They say the odds are growing that it finally will die this year under a series of depressing events, from California’s energy crisis to the big drop in the stock market.
The economy last year seemed to lose the Teflon-like resistance that it had to bad news in the late 1990s, as it had when it escaped unscathed in 1998 as the Asian crisis engulfed world financial markets and plunged one-third of the world economy into recession.
The robust economy gradually succumbed to the shock of a rout in technology stocks that subtracted nearly $4 trillion in value from the Nasdaq Composite Index, and a rolling energy crisis that sparked record high gasoline prices last spring and doubled home-heating bills this winter.
“The longest expansion could be nearing its end,” said David A. Wyss, chief economist with Standard & Poor’s DRI in Boston.
“If things continue to go wrong, a recession will occur,” and the odds of it are about even this year, he said.
The nation’s manufacturing companies, which generate about 15 percent of economic growth, already are in recession. A report released Tuesday showed that industrial production fell for the last three months of 2000 the first full-quarter drop since the last recession in 1991.
But Mr. Wyss said he is most worried about consumers, since consumer spending generates about two-thirds of economic activity. “Confidence is the key to economic growth,” he said.
Until last month, consumers had ignored the slide in the stock market, the electoral impasse and the evidence of slower economic growth, he said, but that changed abruptly “unfortunately, just in time for Christmas,” contributing to lackluster holiday sales.
Mr. Wyss noted that the drop in confidence was concentrated in wealthier households and probably was caused by the stock market drop, which worsened considerably last month. But the loss of confidence also reflected a spate of layoffs, the shock of high home-heating bills and California’s growing power problems, he said.
The chronic energy shortages in California, a state which represents 10 percent of the national economy, have caused rolling blackouts, shut down energy-intensive industries on the West Coast and prompted thousands of layoffs. The state’s botched electricity deregulation process has pushed the state’s major utilities to the brink of bankruptcy.
Another factor that shook confidence last month was the “the postelection fiasco,” Mr. Wyss said, and uncertainty about how the economy will fare under a new president and a new Congress. “Love him or hate him, President Clinton was a known factor and the economy has had a good eight-year run,” he said.
Still, the overall level of consumer confidence, as measured by the University of Michigan and the Conference Board, remains much higher than it was during previous recessions. And consumer spending has continued to grow, albeit sluggishly, he said.
Sensing the danger to consumers and the economy, the Federal Reserve moved aggressively on Jan. 3 to bolster confidence and the sagging economy with a surprise half-percentage point cut in interest rates.
The Fed’s timely move is one reason Mr. Wyss expects growth to keep plodding ahead this year at an average rate of 2.3 percent about half of last year’s 5 percent rate, the highest in the expansion.
Stephen D. Slifer, chief economist with Lehman Brothers in New York, also expects the Fed’s “shock therapy” to restore health to the economy.
“While there is real weakness in the economy, the daily data exaggerate the doom and gloom,” he said. “Although the manufacturing side of the economy has weakened dramatically, other parts of the economy including government, construction and consumer spending on services continue to grow.”
Ian Morris, economist with HSBC Securities in New York, sees danger in last year’s Nasdaq debacle for two reasons. It dried up the capital that tech firms rely on for expansion, and it caused a decline in household net worth for the first time since the last recession.
The wealth of American households until the 1990s expansion was concentrated in their homes. But the technology boom of the last decade and the stock-buying spree that it sparked caused Americans to greatly increase their stock holdings.
The result was last year’s stock drop, combined with rising household debts, overwhelmed a jump in house prices to produce the unusual loss of net worth.
“This is a clear recession warning,” Mr. Morris said. “The last three occasions that saw real wealth decline were 1990, 1980 and 1974 all recession periods. This suggests that balance-sheet repair will be a prime focus for consumers in 2001, which implies a sharp decline in consumption.”
The fall in high-tech growth caused by the Nasdaq collapse also threatens the economy, he said, since investment in information technology has accounted for about 25 percent of economic growth in recent years.
“The Federal Reserve’s resolve to avoid a hard landing in the U.S. economy should not be doubted,” he said. “But good intentions do not always lead to successful outcomes.”
David Levy, of the Jerome Levy Economics Institute, said the high levels of debt and stock market downdraft probably already have plunged the economy into a recession, starting in December.
“Something extraordinary would have to happen to stop this great storm,” he said, including large, rapid rate cuts, “emergency” tax cuts, falling oil prices and other “fortuitous events.”

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