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On January 24th 2002 Alan Greenspan, chairman
of the Federal Reserve, testified before congress.
In his remarks he emphasized that the U.S. economy was beginning to
stabilize. Further, he went on to
say that the economy appears poised for a resumption of economic growth.
Specifically, he indicated there are signs that the economy is correcting the
imbalances that have hinder recent growth and we should see real GDP and
income expansion in the year 2002. As a matter of record the U.S. Commerce
Department reported on January 30th that real GDP grew by a surprising 0.2
percent in 4th Quarter 2001. Many analysts had forecasted a contraction in
economic activity.
Greenspan was also encouraged by the sharp
decline in business inventories, and the recent increase in the index of
leading economic indicators. However, he cautioned that the unemployment rate
would likely continue to rise until some time late in spring. It is very
typical for the unemployment rate to continue to rise even after the economy
starts to expand. This happens because businesses will continue to shed
workers until such time that they are absolutely convinced that the economy is
on an upward growth path. In addition, good economic news will cause
discouraged workers to re-enter the labor force, and this too will cause the
unemployment rate to rise.
It is widely known that the Federal Reserve cut short-term borrowing
rates 11 times during 2001. Moreover, the Federal Reserve has pumped in a
great deal of liquidity into the economy. This is especially true after the
events of September 11, 2001. Federal Reserve data indicates that since the
events of September 11th the money supply as measured by M2 has increased by
approximately 14 percent, and another measure of the money supply Money Zero
Maturity or MZM by an incredible 30 percent on an annualized basis. Moreover,
the $40 billion tax cut resulting from the Economic Growth and Tax Relief
Reconciliation Act of 2001 has also provided some fortuitous economic
stimulation to the economy. In addition the overall decline in energy prices
has helped the pocket books of most consumers and business firms. Lastly, the
warmer than normal winter has helped the vast majority of people. It is true
that winter related leisure activities have been hurt by the warm weather, but
net warmer winters tend to benefit the larger economy by lowering energy
expenditures.
Countering the stimulus provided by the aforementioned factors are the
budgetary situations being faced by approximately 40 of our nation's state
governments. Almost all state constitutions require their state to have a
balanced budget. This will mean that many states will have to either raise
taxes or cut expenditures, or some combination thereof. Thus, to some extent
the pro-cyclical nature of raising taxes and cutting expenditures in a
recession will act as a fiscal drag on the nation's economy. In addition the
financial fallout from the bankruptcy of Enron and Kmart, et. al. will also
have a negative impact on the economy and financial markets.
Wisconsin
is facing a budget shortfall of approximately $1.1 billion by the end of the
2001 - 2003 biennium. Clearly some drastic actions will have to be taken in
order to balance the budget. The good news, if any, is that personal income is
forecasted by the state to increase by 2.2 percent in 2002, and rise to 4.5
percent in 2003. The 4.5 percent figure is more in line with the 4.0 percent
change in 1999 and the 5.3 percent gain in 2000. Thus, the state's forecast
shows that it may well be until 2003 before the state economy fully recovers
from the recession which began in March of 2001. In Central Wisconsin there
are a number of firms who may close or downsize their operations. Specifically
a major paper manufacturer, a large mail order firm, a manufacturer of wood
products, and a food processing facility are likely to curtail a part or all
of their operations in our area. |
