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2001 An Economic Mix

While the economy is expected to slow, the stability of the dollar will improve the U.S. export picture.

In Brief:Expect an economic slowdown in 2001, with minimal risk of a recession. Real GDP will expand by 3.4 percent, after a strong performance in 2000.Consumer spending, business investment and exports will drive 2001s expansion.Our balance of trade for goods and services will deteriorate, with a deficit exceeding $350 billion for the second year in a row.Expect inflation to come down by nearly a percentage point from 3.4 percent last year.The Federal Reserve is likely to reverse course by cutting short-term interest rates only if growth slows down sharply.Hiring will slow down with non-farm payrolls rising 1.2 percent, after gaining an estimated 2.1 percent in 2000.New homebuilding will remain above the 1.5 million mark in 2001 for the fourth consecutive year.Growth in industrial output will shift to a lower gear.Textile industry results overall will be mediocre again this year. The U.S. economy was in the fast lane over the last four years, with growth above 4 percent a year. In fact, last years growth, estimated at 5.2 percent, was the strongest since 1984. After six interest-rate hikes since mid-1999 and a sharp upturn in world oil prices, the U.S. economy is showing signs of weakness. While the jobless rate, at 3.9 percent in October, was down again to the lowest level in three decades, gains in non-farm payrolls have slowed to less than 150,000 per month. As oil prices soared to more than $30 per barrel, up from an average of $17.50 per barrel in 1999, the inflation rate climbed to 3.5 percent by October, up a full percentage point from a year ago. On the bright side, the sharp upturn in oil prices had little impact on the core inflation which excludes food and energy price increases. The concern of a slowing economy is more evident in the stock market prices and, in particular, the technology sector. This, in turn, has added to the fears that the economy may even go into a recession if the wealth effect kicks in, as some analysts fear.Another concern is the value of the dollar as the trade deficit reached an estimated record $364 billion in nominal dollars, an increase of more than $110 billion. While the U.S. trade imbalance reached a new record, the U.S. dollar has gained strength in foreign exchange markets, particularly against the Euro.
 Despite all the concerns, the expansion the longest ever for the U.S. economy is expected to remain intact for another year. The latest consensus forecast of the Survey of Professional Forecasters, conducted by the Federal Reserve Bank of Philadelphia, calls for a 3.3-percent growth in U.S. economic activity in 2001. Our econometric model of the U.S. economy forecasts that real GDP will rise 3.4 percent this year, following gains of 5.2 percent in 2000, 4.2 percent in 1999 and 4.4 percent in 1998. Gains in consumer spending, business investment in equipment and exports will power growth. Further increases in interest rates are unlikely, and there is a possibility that rates will come down half a point from current levels. Job creation is expected to decelerate, while remaining strong enough to hold the jobless rate marginally above 4 percent. Inflation will continue to be under control, assuming no further increases in oil prices beyond $30 per barrel. The dollars value in foreign exchange markets is expected to decline, but the drop will be modest.
 Factors Contributing To OutlookHere are the main reasons for this outlook. With economic growth in Asia back in the fast lane, world demand for petroleum has risen by more than a million barrels per day in the last two years. World demand rose to an estimated 76.1 million barrels per day in 2000, up 6.2 million barrels from 1995, which was an acceleration from an increase of only 3.9 million barrels in 1990-1995. It is not surprising that OPEC had little difficulty pushing oil prices up to current levels. Despite a slowdown in economic activity in the United States, the daily world demand for oil is likely to go up by another million barrels in 2001, assuming normal winter conditions prevail. This means that OPEC will not be in a rush to bring oil prices down by increasing production. As a result, oil prices are unlikely to fall sharply from current levels. The U.S. refiners acquisition price of crude oil is assumed to average $27.11 per barrel in 2001, down 2.3 percent from $28.95 per barrel in 2000, but up 55 percent from $17.50 per barrel in 1999. This means that the impact of slightly lower energy prices on this years U.S. inflation rate will be small. With the U.S. population growing by 1.0 percent per year and the labor force participation rate slowing down, the labor supply gain is capped at 1.4 percent per year. With the economy adding 150,000 jobs a month in 2001, the unemployment rate will edge up to 4.1 percent from 4.0 percent last year. Faced with a slower growth and squeezed profitability, the focus of employers will be on increasing productivity gains and tying compensation to profitability. As a result, wage increases will be modest.
 Assuming no major surprise, food prices are expected to move up not more than the overall inflation rate. Thus, low inflation and a low unemployment rate will continue to coexist for another year. Year-over-year inflation is seen rising by 2.5 percent in 2001, down by nearly a percentage point from the 3.4 percent in 2000. U.S. exports growth and a gradual decline of the value of the dollar in foreign exchange markets will be a positive factor on profits from foreign operations. With the overall industrial operating rate at 82.0 percent in 2001, virtually flat from 82.2 percent in 2000, growth in capital spending on plant and equipment in manufacturing will follow suit. However, the big boost in capital spending on equipment in the last five years came from investment in information- and telecommunications-related equipment. In the telecommunications sector, only the major players can be expected to continue increasing investment in replacements and on new technologies. With stock prices sharply down, smaller players will have a tough time raising capital in the financial markets to expand investment. Furthermore, many of the Internet-related start-up companies, which contributed to the growth in capital spending on information equipment, are faced with the prospect of going out of business. In short, real nonresidential investment is seen rising 5.5 percent in 2001, less than one-half the gains of 12.9 percent in 2000, 10.1 percent in 1999 and 13.0 percent in 1998.
 As the nations output of goods and services expands by 3.4 percent, non-farm payrolls are expected to increase by 1.8 million over the course of 2001 down from an estimated 2.4 million jobs created in 2000. With low inflation, growing employment and rising incomes, consumer spending will be quite healthy rising 3.4 percent in 2001, after surging 5.3 percent last year.Total sales of new light vehicles are expected to ease a bit to 16.8 million units in 2001, from a record 17.4 million in 2000. This will be the third year in a row having total unit sales above 16.5 million, and the eighth year above 15 million. New construction will edge down to 1.55 million, from 1.6 million in 2000. Accordingly, the pace of consumer spending on durable goods will slow down to 3.8 percent, after double-digit growth in each of the previous three years.The balance of trade deteriorated rapidly last year, as the U.S. economy grew at a fast pace and economic activity overseas was modest. Total U.S. exports grew 11.9 percent in nominal terms and 10.1 percent in real terms, as economic activity returned to high growth in Southeast Asia. Meanwhile, imports continued to be a sore point for the United States, even after factoring out the impact of the sharp rise in oil prices. Strong domestic demand and a 3.5-percent appreciation of the dollars value against most of the currencies combined to push imports up 13.6 percent in real terms in 2000. In current dollars, the trade deficit ballooned to an estimated $364 billion, from $254 billion in 1999.
 The return of high growth in Southeast Asia, coupled with a small decline in value of the U.S. dollar in foreign exchange markets, will help U.S. exports in 2001 grow by 7.5 percent in real terms, led by capital goods down from an estimated gain of 10.1 percent last year, but a major improvement from the anemic increases of 2.9 percent in 1999 and 2.3 percent in 1998.Our growth in imports is expected to slow down, as U.S. economic activity decelerates from 2000s booming rate. The end result, however, would be a small improvement in the trade deficit in net exports of goods and services in nominal terms. With surpluses for the fourth year in a row, after large deficits for nearly three decades, federal government spending adjusted for inflation is expected to post a modest gain in 2001. This will be the third year in a row that government spending grows, reversing real spending declines for eight consecutive years. Furthermore, with the school-age population increasing, spending by local and state governments is seen growing by 2.9 percent in real terms, down from 3.5 percent in 2000 and 3.8 percent in 1999.
 Textile Forecast Shows Little PromiseProspects for U.S. producers of fibers, textiles and apparel are not very promising for 2001.Clothing prices have been on the decline since 1992, except for 1998, falling by an average of 1.2 percent per year. The decline in prices has contributed in part to the strong demand for clothing in real terms. In 2001, total outlays for clothing and shoes are expected to grow 6.6 percent in volume and 6.0 percent in dollar terms. Last year, spending on clothing and shoes surged 8.7 percent in volume and 7.0 percent in dollar terms. The trade deficit for apparel ballooned to an estimated $56.6 billion in 2000, from $48.5 billion in 1999 and $45.2 billion in 1998. Unfortunately, all the benefits of increased domestic demand for apparel accrued to foreign producers because U.S. output of apparel declined 3.8 percent last year, on top of a loss of 6.4 percent in 1999.Because U.S. industrial output is expected to soften this year, industrial fibers and textiles will end at their current levels. With the vacancy rate down to low levels, the addition of 1.8 million new jobs in 2001 bodes well for additional demand for office space and a small improvement in new construction. In 2001, investment in nonresidential buildings is expected to grow by about 1.5 percent in real terms, after surging 8.5 percent in 2000. With after-tax corporate profits still up by 3.5 percent in 2001, growth in business spending on carpeting and furnishings will slow down. Demand for U.S.-made fibers, textiles and apparel is likely to decrease in 2001. Exports will make a minor contribution to growth as economic activity overseas improves, while imports will continue to gain ground, resulting in further deterioration in the trade gap.Despite a gain in economic activity, production of domestic apparel and products is expected to decline in 2001 for the sixth year in a row. In 2000, output was down an estimated 3.6 percent, after falling 5.6 percent in 1999. Textile production is expected to decline 2.2 percent this year, after falling 2.3 percent in 2000 and 3.4 in 1999. Shipments by textile producers are expected to ease to $77.0 billion, from an estimated $77.5 billion in 2000 and $78.3 billion in 1999. In a slowing economy with low inflation and still a relatively strong dollar, wholesale textile and apparel prices are likely to remain essentially flat for the second straight year.The outlook for the industrys payrolls is for a 3.7 percent drop, down for the seventh year in a row. Payrolls declined 3.5 percent in 2000 and have declined by 157,200 jobs since 1994. Expect employment to average 520,000 jobs in 2001, down nearly 20,000 jobs from last year. Finally, hourly wages will rise 3.0 percent in 2001.
 In a cutthroat environment, the industrys capital spending will be concentrated on replacing noncompetitive capacity and increasing efficiency in order to defend domestic markets from rising foreign competition. In 2000, growth for textile exports slowed down to a meager gain of $0.1 billion, while imports rose by $1.0 billion, lifting the textiles net trade deficit for 2000 to $6.3 billion from $4.4 billion in 1999 and $3.9 billion in 1998. Clearly, the sharp appreciation of the dollar in the aftermath of the Asian crisis is partly to blame. While the industry is to a large extent insulated from foreign competition due to its capital intensity, the trade deterioration in the last three years is not likely to go away in the near future. Moreover, in a low-inflation environment and with squeezed profit margins, rationalization is unavoidable. With the industrys operating rate down to 81.1 percent from 82.3 percent in 2000 and 83.1 percent in 1999, this years textile spending on plant and equipment cannot be expected to grow. Risks To The ForecastA major risk to our economic outlook is the uncertainty due to the possibility of higher oil prices if there is any disruption in the Middle East. A jump in oil prices will tax consumer budgets, which in turn will accelerate the slowdown in consumer spending. In this case, economic growth will be in the 2.5- to 2.8-percent range in 2001. On the bright side, if oil prices subside and fall below the $25-per-barrel mark, inflation will be lower and the U.S. economy is likely to pick up speed in 2001, with growth at better than 4.0 percent. January 2001



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