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Many economists believe that the sluggish nature of the
economy will play itself out during the course of this year.
The consensus is that after a slow start the economy will post 2 to 2.5
percent growth rate in real GDP for 2001.
As a reminder, the economy expanded at only a little over 1.0 percent
during Fourth Quarter 2000 and rebounded to 2.0 percent growth during First
Quarter 2001. The unemployment
rate in the country is also likely to edge higher over the year, because many
firms are laying off workers in response to falling demand. Although most analysts see the unemployment rate rising, they
expect the rate to stay at a fairly low level.
The national unemployment rate in Fourth Quarter 2001 is forecasted by
some groups to be in the 4.50 to 4.75 percent range.
A major factor confronting the economy is the
sudden buildup of inventories. The
economic recovery to a very large extent is predicated on how fast this excess
inventory is brought down to an optimal level. Clearly
the hardest hit area of the economy has been the manufacturing sector. Unlike
past slowdowns, improvements in information technology have helped these firms
to adjust more quickly to the imbalance between supply and demand.
It would be expected then that their reactions would be more swift and
decisive; thus, causing a sharp slow down in activity and an increase in
layoffs. The good news, however,
is that this swift action should prevent the inventory problem from festering
into a more serious problem, that otherwise would take a much longer time to
work out of the economy and thus prolong the misery.
Another very important factor, which should
mitigate the length of this period of lethargic growth, has been the
aggressive actions taken by the Federal Reserve.
The Federal Reserve has recently cut the federal funds rate and
discount rate three times. Each
time the rates were cut by .50 percent. The
Federal Reserve stated it was very concerned about the rapid deterioration in
economic conditions. One item in
particular was the sharp pull back in business investment.
Business investment had been a key component in the economy's recent
rapid expansion. The Federal
Reserve hopes that the easing of credit conditions will stimulate consumer
demand and ultimately prompt businesses to reassess their investment
opportunities.
One big unknown at this juncture will be the
behavior of energy prices. Prices
could move upward if demand in the economy picks up quickly.
Higher energy prices for electricity, gasoline, and natural gas could
dampen economic growth. This is
particularly worrisome for the already strapped west coast and the energy
importing, manufacturing dominated, midwest.
Moderation in energy price growth would help the majority of businesses
and help the pocket books of consumers. Even
with the problem of high energy prices, inflation overall is not forecasted to
be a major concern for the nation. Most analyst are saying that the overall inflation rate
should fall between the 2.0 percent to 2.5 percent range for 2001.
The major reason cited for the low to moderate inflation figures is
predicated on the idea that a slowing economy and layoffs should place
downward pressure on the demand for goods, services and labor.
In
sum, the economy in the second half of the year should look better than the
first part and the likelihood of avoiding a recession is growing stronger by
the day. However, recent data
concerning the number of jobs lost in April suggests that we are not passed
the point of entirely discounting the possibility of recession. |
