'03 outlook just so-so, but tinged with hope

www.accessatlanta.com [The Atlanta Journal-Constitution: 01/26/03] By DONALD RATAJCZAK For the Atlanta Journal-Constitution

Amid reviewing last year's forecast, discussing President Bush's stimulus package and assessing the problems in Georgia at the beginning of Gov. Sonny Perdue's tenure, I forgot to discuss my own outlook for 2003. How can I be graded if I do not hand in my homework?

Of course, I probably was trying to avoid a very difficult task. Three major "geopolitical" uncertainties cloud the horizon. Venezuelan oil has been unavailable for about eight weeks, and the promised additional oil from the Middle East is nearly a month away. With cold weather descending, relief from higher energy prices will not happen before we begin to see dogwoods.

An Iraq conflict probably will lead to oil field destruction in that country (see Kuwait 12 years ago) as well as immeasurable economic and human costs. Even that Venezuela makeup oil from the Middle East could stop if the conflict turns nasty.

Then, there is North Korea and what must be done in that part of the world to maintain stability but register firmness. At a minimum, some diplomatic magic is needed there.

To add to the uncertainties, tax policy will be changed but portions of the proposal, such as the dividend exclusion, are in serious jeopardy. Even the president is ignoring dividend exclusions as he attempts to sell the package as a small-business aid.

Unfortunately, these uncertainties are restraining the decision-making of corporations. Three years ago, Intel's capital spending was $7.1 billion. Projection capital spending for 2003 is only $3.5 billion.

Parked planes, unfinished wireless networks, abandoned power plants and rapidly emptying office space attest to a serious glut of resources. Profits are up about 9 percent in the fourth quarter, but from a 21 percent decline in the previous year.

To further dampen spirits, auto sales are losing their responsiveness to new incentives; the average worker's raise is being spent at the gasoline pump and with the fuel oil deliverer; the strong housing market already is ahead of household growth; and imports are overwhelming local producers. As we see in Georgia, local economies face higher taxes, lower government pay and reduced services.

The outlook for the next six months is unusually cloudy, but I do see the sun shining before year's end. With no more hedging, here is my U.S. forecast for the next 12 months:

Consumer spending, housing and inventory-building will sustain activity through the spring. By then, more clarity will surface on the geopolitical issues. Also, capacity no longer is growing. If jobs begin to grow by summer, as I expect they will, corporate spending will begin to rebound.

Furthermore, the drastic slide in the dollar against European currencies will lead to American goods being sold there. Asia will be more difficult, but our trade balances should begin improving later in the year. And some tax stimulus will be forthcoming. (Given the uncertainties, stimulus is needed and ought to happen sooner rather than later.)

After less than 1 percent real growth last fall, I expect GDP to slowly gain momentum through a 2 percent growth rate in the winter and spring to more than 3 percent in the summer and almost 4 percent as the year ends.

Inflation will remain muted except for oil and some meat products. Consumer prices grew only 2 percent at annual rates in the past three months but should spurt to nearly 4 percent in the winter. Gains of 2 percent to 2.5 percent should be the norm for the remainder of the year, with the possibility of slightly less than 2 percent gains as gasoline prices subside during the summer.

Until the fourth quarter, employment growth will not be enough for the Federal Reserve to even think about raising interest-rate targets. If the current uncertainties prove too constraining, they may even lower rates this winter. Long-term rates will remain near current levels (4 percent yield on the 10-year government note) until activity begins to hum late in the year. Mortgage rates should remain under 7 percent into 2004.

Uncertainty is not the friend of stock investors. Although seasonal factors currently favor equity holdings, the "geopolitical" issues are canceling out those positive money flows. That 9,000 Dow hurdle may not be breached until summer and then only briefly. A more sustained rally to challenge 10,000 is likely late in the fall.

Unemployment rates should rise to 6.5 percent before beginning to subside late in the year. Wage gains will remain anemic, at 3 percent in most shops and under 4 percent in most offices.

Despite this less-than-robust economic recovery, some healing will be accomplished. Households will be saving about 6 percent of their incomes after the next reduction in tax liabilities. Their balance sheets also will continue the improvement that started last fall. American industry will be competitive in Europe and will be fighting back against competitive pressures in Asia.

Indeed, the weak dollar may aid healing in South America, although much more than economics is needed in Venezuela and Colombia.

New capital will displace older systems, especially as corporate profits approach their 2000 levels by the end of 2003.

Thus, I see the glass as half full with a water source nearby. But we need to hold firmly onto that glass as we plow through geopolitical problems in the first half of this year.

Donald Ratajczak is a regents professor of economics emeritus at Georgia State University.