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Economic conditions have changed dramatically in the
United States since the latter part of 2000.
Real GDP grew by only 1.4 percent in Fourth Quarter 2000 the lowest
rate in more than five years. Further
evidence of the economic deterioration comes from many sources.
Earning disappointments on the part of corporate America attest to the
sudden weakness in the economy. Layoff
announcements are becoming the norm for many well-known corporations.
Companies such as General Electric, Amazon, J.C. Penney, Daimler
Chrysler, Xerox Corp., Black & Decker, AOL Time Warner, WorldCom Inc.,
Hewlett-Packard Co., Boeing Co., Sara Lee, Lucent Technologies, Gateway Inc.,
Nortel Networks Corp. and many others have announced significant job cuts.
In addition, the index of Leading Economic
Indicators (LEI), has declined in seven of the past eight months.
In December, the LEI contracted by a rather large 0.6 percent.
The Conference Board's CEO business confidence index and various
consumer confidence surveys have fallen dramatically over the last half of
2000 and the start of 2001. Since
consumer spending accounts for two thirds of total spending, the latter is
especially troubling. Automobile
sales are in a slump for car manufacturers and manufacturing in general
appears to be suffering from over capacity.
Capital goods orders, a significant contributor to the expansion, are
falling relative to past periods which means that business investment in
factories, plant, equipment, and inventories will slow in the year 2001.
The sudden deterioration in the economy suggests that
economic growth will come to a virtual standstill in the First Quarter 2001.
In the estimation of some economists, the probability that the country
will slip into recession during the first half of 2001 has risen above fifty
percent. Factors contributing to
this deterioration include: rising fuel and energy costs, past interest rate
hikes by the Federal Reserve, over capacity in the manufacturing sector, the
bursting of the technology stock bubble, and falling consumer confidence.
All of these items, plus others, have come together to impact the U.S.
economy in a major way.
The Federal Reserve has become so concerned about
the deterioration of the economy's health that it has taken drastic action
to ease credit conditions. On two
occasions in January, the Federal Reserve cut the federal funds rate by 50
basis points. This move to cut
short-term borrowing rates by a full percentage point in less than a month is
almost without precedence. It is
a very dramatic shift in economics policy for the nation's central bank, which
reflects how seriously the Fed perceives the threat of recession.
The problem of course is that a cut in interest rates will not have a
noticeable influence on the economy for approximately six months.
A tax cut like the one proposed by the Bush Administration would take
even more time to have a substantial impact on the economy.
Thus,
the first half of 2001 is likely to be a period whereby economic growth is
difficult to achieve. Our region
will be affected by these macro events and will face a period of diminished
expectations. Historically, the
Midwest, and in particular Wisconsin, has fared worse than the rest of the
country when there is an economic slow down centered in the manufacturing
arena. Even after many years of
restructuring, Wisconsin is still relatively more dependent on manufacturing
than the rest of the country. A
number of companies that have an economic presence in Wisconsin are facing
difficult product markets. For
example, Kimberly Clark, Wausau-Mosinee Papers, Stora Enso, Shopko, Northland
Cranberry, and Bendix are facing stiff competition and have announced efforts
that will enhance the profitability of their operations.
Layoffs and closures will be part of their response.
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