For Immediate Release May 20, 1999
Contact:
Bruce D. Brooks
404/651-2645
[email protected]
Georgia State Release National Economic Forecast
ATLANTA -- Rapid consumer spending coupled with a decrease in housing construction this year is increasing the possibility of higher interest rates by the Federal Reserve by its August meeting, according to the latest projections by Dr. Donald Ratajczak, director of the Economic Forecasting Center at Georgia State University. A hike in interest rates by 3/4 to 1 percent would lead to as much as a 20 percent correction in the stock market, according to Ratajczak. Overall, the economy is expected to remain relatively strong in 1999, but a slowdown is expected for 2000 and a recession may be likely by the fall of 2001.
According to the quarterly forecast, three forces are presently dominating the economic conditions in the U.S. with the net effect of these forces being an economy expected to expand 4.2 percent in 1999, before slowing to 2.2 percent gains in 2000. First, consumers are spending some of their wealth accumulated through stock market and real estate gains. Furthermore, over the past four years mortgage equity debt has risen from $170 billion to $440 billion, due to the aggressive use of home equity debt to finance investments and spending.
Second, capital spending remains strong. Productivity gains are the highest of this expansion, suggesting that technology embedded in capital continues to be effective. In addition, prices of capital goods continue to fall and computer prices are expected to decline 25 percent this year. Despite recent increases in long term rates, financing continues to be available and affordable.
Third, weak economies abroad are not purchasing American goods, however they are selling to America at discounted prices. Last year exports grew 1.5 percent while imports grew 10.9 percent after the adjustment for price declines. Currently, the trade deficit is $200 billion and should increase to nearly $250 billion by the end of 1999. Eventually these heavy outflows of dollar assets will need to be priced more aggressively to be absorbed. Thus, the dollar is subject to weakness before the end of this year.
Inflation is beginning to intensify. The forecast projects that the consumer price index will increase 2.5 percent in 1999 and 2.6 percent gains in 2000, following gains of only 1.6 percent in 1998. Interest rates will increase, however the forecast suggests that due to uncertainties about international financial flows and Y2K concerns, this is not probable until the latter half of 2000. Following, three small increases in short-term rates are likely.
The Federal Reserve can be expected to take action before this projection if the world economy recovers more rapidly, or if defense spending for Kosovo becomes larger than currently projected. In the forecast, annual government spending rates are increased by $10 billion in the spring, $25 billion in the summer, and $10 billion in the fall from what otherwise would have occurred to meet the Kosovo needs, assuming termination of operations by the end of September. Longer action or an increase in the intensity of action would require more substantial government spending.
Stock market prices were seen as ignoring the potential inflation fighting policy shift and the uncertainties surrounding Kosovo spending. For this reason, a correction is expected before the end of the summer that could drop the Dow Jones to less than 9200. Although inventory accumulation is expected to strengthen 1999's fourth quarter activity, followed by weak activity as the inventories are used early in 2000, Y2K disruptions are not likely to be a serious impediment to economic growth.
The report concludes that no recession is likely this year or in 2000. However, a weakening dollar, rising inflation and Federal Reserve restraint in the latter half of 2000 could mean recessionary prospects in the second half of 2001.
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For more information, Contact: Dr. Donald Ratajczak, 404/651-3291
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