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Revised data from Washington indicates that
real GDP actually contracted during the first three quarters of 2001. From
fourth quarter 2001 to the end of third quarter 2002, the national economy
will likely expand at about a 3 percent rate. By most standards a 3 percent
gain in real GDP is a respectable rate of expansion. However, this recovery is
not being perceived by the public as being as strong as the 3 percent growth
might suggest.
The expansion has been characterized by the
media as being a so called jobless recovery. The published numbers on job
creation suggest that the economy is growing without the usual commensurate
gains in industrial sector employment. Most sectors in the economy are not
hiring at rates that would be normally associated with a recovery period. The
explanation for this phenomenon comes from the continued growth in worker
productivity. Gains in worker productivity have allowed firms to increase
output without hiring additional workers. In other words, it might take a
rather large increase in demand for most firms to hire a large number of
workers. In addition, the financial woes of Wall Street have placed a damper
on the public's perception of the economic well being of the country.
The economy, while growing at a respectable
rate in terms of output, is not expected to race forward anytime soon. It
seems that every time the economy starts to move forward at a brisk rate, we
become aware of a new problem that stalls the growth rate of the economy.
Whether it is the problems of the telecommunication industry, corporate
accounting scandals, or a possible war with Iraq, unsettling events have
continued to shake consumer and business confidence.
The good news is that business inventory
levels are being reduced in an orderly fashion, that consumers are continuing
to spend, and a lower valuation of the U.S. dollar against foreign currencies
should all provide momentum to the economy into the year 2003. Of equal
importance has been the activity taking place in the realm of monetary /
financial matters. Bank credit appear to have risen dramatically over the past
quarter, up by 10.5 percent. The increase reflects gains in real estate loans,
security loans, home equity loans, and other consumer loans. In addition, the
Federal Reserve has pumped a great deal of liquidity into the economy. Over
the past quarter M3 has risen at a 7.1 percent clip. It also appears that
households have not given up on investing, as there has been a definite shift
from equities to bonds and real estate. Thus it appears that households are
rebalancing their portfolios rather than giving on the future. The record also
shows that corporations are issuing large amounts of bonds and other forms of
debt to finance future economic activity.
All of the above point toward a stronger
economy in 2003. The one wild card is the situation surrounding Iraq. At this
juncture, no one knows if there will be a war. As has been reported in the
media, a war with a short decisive victory would stimulate the economy.
However, a long protracted conflict that spreads throughout the rest of the
Middle East could cause the economy to slip back into recession. This scenario
would transpire if consumers and businesses lose confidence in the U.S.'s
ability to bring the war to a swift conclusion, or if oil prices sky rocket
during a prolonged engagement. The aforementioned factors, confidence and
energy prices would stifle economic activity. For example, researchers have
estimated that for every $5 increase in a barrel of oil, corporate profits
decline by approximately 2 percent. This would have widespread ramifications
for the economy.
Our
state and region are undoubtedly being influenced by the factors alluded to
earlier. Thus, the best forecast at this point in time is that the state and
region will continue to grow with regard to the creation of goods and
services, but this growth will come with a sluggish job market. However, the
conditions seem primed for a stronger recovery next year. The most vexing
problem for the state is the looming budget deficit. Eventually the state is
either going to have to generate more revenue or cut programs to balance the
budget.
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