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November 27, 2000

Slower Growth Or Hard Landing? Not So 'Black And White,' Economist Says
By Rex Nutting,

Consumer Demand Won't Save Slow Economy ... Weiss comments

WASHINGTON - Financial markets are gearing up for more evidence that the economy has slowed in the last half of the year.

In the coming week, a full schedule of economic releases awaits investors. On the top of the pile -- the revision to third-quarter gross domestic product and the closely watched monthly survey from the National Association of Purchasing Management.

Both releases should show a weaker economy.

"We could have a one-handle on GDP," said Diane Swonk, chief economist at Bank One. The Commerce Department's first estimate of third-quarter GDP was 2.7%, but new data on trade and inventories will surely be lower than first estimate -- perhaps below 2%, as Swonk said.

The consensus estimate among economists surveyed by is for the GDP number to be revised to 2.4%, although some estimates are much lower. The NAPM index reading for November is expected to come in at a weak 48.5%, about the same level as that seen in October.

Eye on the fundamentals

"Can you imagine the impact on the market?" Swonk said. But she says the GDP number -- and the NAPM data later in the week -- won't change the fundamental picture: namely, that the U.S. economy is strong.

Regardless of what the GDP number says, Swonk insists the economy is poised for a strong rebound in both the fourth quarter of 2000 and the first quarter of next year.

"We've been going through an incredible inventory cycle," the economist explained. High inventories have depressed manufacturing activity, but in Swonk's view, that's about to fade away.

"The key is fundamental demand," she said. "I haven't seen anything to indicate that demand is dropping off the edge of the earth."

"We've got consumer confidence at near record levels," she said. The unemployment rate is at a 30-year low and consumption spending is growing. All of which leads Swonk to pose the question, What hard landing?

"We're in a transition to slower growth," Swonk said. "This is not a hard landing. But markets want to go black and white on everything."

It seems that Wall Street is looking at statistics through rose-colored glasses again. The bear has stuck his paw in the door, and analysts are busy admiring his manicure while ignoring the fact that there's a 500-pound grizzly attached to it!

For instance, the truth is that consumer spending they're touting was the last fling of shoppers extending their credit to the breaking point. Wall Street is ignoring that U.S. consumers have racked up nearly $1.5 trillion in debt. This is a staggering load -- Americans will simply be unable to continue their record consumption as the economy slows and the stock market plunges from its highs.

Investors are already dealing with high gas prices and home heating bills. Add on high credit card bills, and there is little left over for binge shopping.

And while the employment rate is at a 28-year low, layoffs are mounting as companies try to increase their bottom line by streamlining employees. Increased layoffs will deal consumer confidence a crippling blow.

The 'wealth effect' of the stock market bubble sent consumers into a shopping frenzy, and that, in turn, inflated the bubble even more. But now, the bubble has burst -- dot-coms are imploding one by one, company earnings are disappointing, and corporate loans are teetering on the edge.

The fundamentals are clear: the U.S. economy is headed for a hard landing.

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