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January 2, 2001

Economic Growth Is Expected To Slow to a Crawl in 2001
By Constance Mitchell Ford, The Wall Street Journal

Economy Will Swim The Backstroke in 2001 ... Weiss comments

NEW YORK -- 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.

"We're in the aftermath of the boom where negative events are accumulating and interacting to produce surprising weakness," said Allen Sinai, chief economist at Decision Economics in New York.

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.

Under current economic assumptions, a growth rate between 3% and 4% is considered optimal because it is strong enough to keep unemployment low and job creation strong, but not so strong as to boost inflationary pressures. A growth rate in excess of 4% prompts concerns about inflation while a rate around 2% -- the consensus forecast -- is considered subpar.

"People are going to have to get used to life in the slow lane," says economist Nicholas Perna of Perna Associates in Ridgefield, Conn. Although modest growth would seem to be better than no growth, Mr. Perna says the impact of such a sharp turnaround in the economy has nearly the same impact as a contraction when it happens so suddenly. "It's like a speeding car that suddenly downshifts; you really feel the impact," he says.

"People were really surprised at how fast the economy seemed to fall apart in the fourth quarter," says Maureen Allyn, chief economist at Scudder Kemper Investments in New York.

The sharp downturn that the U.S. economy experienced in the latter half of 2000 is merely an introduction to what will happen in 2001. Right now, the economy is barreling toward recession, with no quick fix to prevent it. Even the interest rate cut that Wall Street sees as the surefire cure-all would trigger uncontrollable inflation instead of halting the oncoming recession.

The economy faces fundamental problems. High oil, natural gas, and electricity prices continue to shock the economy. Inventories of oil and natural gas are at some of the lowest levels ever seen even as a cold winter threatens to send energy consumption through the roof. Plus, California is facing a power drought that could essentially shut down the entire state -- electricity provider Pacific Gas & Electric announced today that it only has three more weeks of operating cash left. These energy shocks have forced production costs higher for businesses and stopped consumers from spending as they are faced with skyrocketing utility bills.

Consumers are cutting back on spending even as businesses ratchet back on investments in new technology. Together, these make up a one-two sucker punch for the economy.

Perhaps one of the most severe factors that will choke off economic growth is the credit crunch that we have told you about. The lack of funding options has prompted companies to slash any investment in innovation or expansion. That means no new products or revenue streams for businesses. It also means that company earnings will continue to disappoint Wall Street, and stocks will continue to tumble.

With all of these factors, it is difficult to see how the economy could recover dramatically in the first few months of 2001. Sustained high energy prices, reduced spending, and the credit crunch will continue to pound on the economy well into the New Year.

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