NEWS

Recession gone, U.S. begins another era of strong economic growth, expert says

By DAVID WILLIAMSON
UNC News Services

CHAPEL HILL -- After its mildest recession ever, the U.S. economy has come roaring back to lead the world to new economic records, a University of North Carolina at Chapel Hill business expert says.

"Nearly every new piece of economic data reported over the past couple of months has been positive," said Dr. James F. Smith, adjunct professor of business administration at UNC’s Kenan-Flagler Business School. "This is true whether the news covers a broad or a narrow area."

The most comprehensive data released covered real gross domestic product, Smith said. The Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce announced last month that the final estimate of growth in real GDP in the fourth quarter of 2001 was a seasonally adjusted annual rate of 1.7 percent, well above the initial estimate of 0.2 percent. For all of 2001, growth in real GDP was 1.2 percent, a sharp decline, because of the recession, from the 4.1 percent pace of both 1999 and 2000.

"On March 29, the BEA reported that both personal consumption expenditures and personal incomes rose by 0.6 percent in February from the January levels," he said. "This was the largest increase in personal income since December, 2000. Not surprisingly, this big jump in income made consumers much more upbeat than they had been."

The Index of Consumer Sentiment, compiled by the Survey Research Center of the Institute for Social Research at the University of Michigan, grew from 90.7 in February to 95.7 in March.

"History suggests than any level of this index above 90 is good news for vehicle sales and housing purchases," Smith said.

Also, the Index of Consumer Confidence, compiled by the non-profit Conference Board, a research and policy organization, using different methods, was released March 27, he said. It leapt from 95 in February to 110.2 in March, the largest monthly increase in 15 years.

Smith, rated by the Wall Street Journal as the nation’s most accurate economic forecaster in three of the past five years, made his remarks in the latest issue of the Business Forecast, a newsletter he writes for the school.

"At first glance, the report on existing home sales for February might look disappointing, as they fell 2.8 percent from the January level," he said. "However, since January was an all-time record of 6.05 million homes at a seasonally adjusted annual rate the first two months of 2002 are the best two months ever recorded for existing home sales, so the picture looks bright indeed."

Housing starts are also strong, especially for single-family homes, the economist said. Total housing starts ran at 1.77 million units in February, up from 1.72 million units in January. Of those, 1.46 million units were single-family units in February, up from 1.36 million units in January. If that trend continues, 2002 will be the strongest year for single-family home construction in 20 years.

"There are a number of reasons to expect the U.S. economy to rebound quite strongly even from the very mild recession of 2001," Smith said. "To begin with, the Federal Open Market Committee, the part of the Federal Reserve System that sets monetary policy, cut the target for the federal funds rate, the interest rate that banks charge each other for overnight loans, an unprecedented 11 times."

Cuts came in every month except July, he said. Last year began with a federal funds rate target of 6.50 percent and ended at 1.75 percent, the lowest level for the Federal Funds rate since 1961.

"Since nothing spurs the U.S. economy more than low interest rates, this is very good news for economic growth for some time to come," Smith said.

Other major economic stimulants have been tax cuts, payments to the airlines and New York City, additional spending for national defense and homeland security and other federal programs such as "The Job Creation and Worker Assistance Act of 2002," which Smith quipped should be called "The Incumbent Reelection Protection Act."

Other encouraging signs are that consumers are spending freely and that homeowners are refinancing mortgages to get lower rates, thus saving some $50 billion for other purposes. Overall, equity in the $12 trillion in real estate they owned was $6.6 billion.

Smith’s forecast for real gross domestic product growth for 2002 is 4.2 percent. That good outlook assumes that there will be no large, successful terrorist attack in the United States during the year.

"We may go to war with Iraq, which would briefly unsettle oil prices," he said. "We would win in fairly short order, and the new government there would undoubtedly want to rebuild the country by selling more oil. That’s a recipe for lower oil prices for the long run."

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Note: Smith can be reached at (919) 968-9995, 593-0308 (cell) or smith.jf@mindspring.com

Contact: David Williamson, (919) 962-8596