Банкеръ Weekly

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ECONOMIC GROWTH IS EXPECTED TO SLOW IN 2001

The party is over and the hangover is about to begin.
That, essentially, is how economists are viewing the year-2001 economy. Following one of the most spectacular and volatile years for the economy in decades -- when growth zoomed in the first half of the year, then slowed abruptly in the second half -- the year-2001 economy is expected to grow at a relatively sluggish pace throughout the year.
Most economists don't expect a full-blown recession this year, but nearly all of them warn that the risk of recession is substantially higher this year than it has been in many years. That is because two major forces that powered the U.S. economic boom - strong consumer spending and business investment - are fading due to rising interest rates and the sting of higher energy costs.
The consensus forecast for the 54 economists in The Wall Street Journal's latest semiannual forecasting survey calls for the economy, as measured by changes in inflation-adjusted gross domestic product, to grow at an annualized rate of about 2% for the first half of 2001. That is less than half of the rate the GDP registered for the first six months of 2000. The economists are betting the Federal Reserve will lower interest rates during the first few months of this year, which will lay the foundation for slightly stronger growth later in the year when the GDP is expected to advance at a rate closer to 3%. The consensus forecast also calls for milder inflation, a higher unemployment rate and lower interest rates over the next six months.
In The Wall Street Journal's forecasting surveys a year ago, nearly all the economists polled at the time were euphoric about the economy's prospects for the first half of the year 2000 - and those forecasts were in line with actual results. Six months ago, in The Wall Street Journal's midyear forecasting survey - most economists believed the economy would slow in the second half due to the Federal Reserve's drive to tighten monetary policy. But the economists were looking for the Fed to engineer a perfect soft landing with growth running at an annual rate of about 3.3% during the second half of 2000. The government won't release the figures for fourth quarter GDP until later this month, but figures for the third quarter showed annualized growth of just 2.2% and other recent economic indicators for November and December seem to suggest the economy was far weaker in the second half of 2000 than expected.
Economists aren't only surprised at what has happened, but they are sharply divided over what will happen next. Although the consensus forecast calls for anemic growth, individual forecasts show wide differences. Essentially, the economists are split into three distinct forecasting camps: the pessimists who believe the economy is heading for bigger trouble; the optimists who believe the doom-and-gloomers are overreacting to early indicators; and those who are straddling the fence because they can't figure out which side to take.
Other findings in the forecast. Of the 54 economists who participated in the survey, an overwhelming majority, 38, support President-elect George W. Bush's plan to cut taxes as a way to stimulate economic growth. Only 14 said tax cuts are a bad idea. Two economists didn't answer. When asked to assess the odds of a recession in the 2001, 25 placed the odds at between 30% and 60%; 25 said the odds were less than 30% and just three placed the odds above 60%.

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