UA Economists Predict Continued Recession Headaches in 2002

Dec. 14, 2001

Hold onto your seat. It's going to be a bumpy ride.

The United States' economy has been officially in recession since March after the National Bureau of Economic Research made the numbers official in April. (Forecasters "never, EVER forecast a recession," says UA economics forecaster Marshall Vest. "That's rule number one in the 'forecasters' handbook.'")

Vest says the Arizona economy is also in recession and will remain so until at least the first quarter of 2002. Vest's colleague, UA economics Professor Gerald Swanson says, yes, the nation is in a recession and will remain that way through the summer. Two somewhat differing views from two practitioners of the "dismal science." Vest and Swanson offered their assessments of the future of the U.S. and Arizona economies to a crowd of about 650 at the annual Economic Outlook luncheon in Tucson.

Vest, a survivor of the attack on the World Trade Center on September 11, says the nation's economy was teetering between recovery and continued recession when the terrorists struck New York and Washington. That sealed it. While most hard data are not yet available to measure the economy's performance during the fourth quarter of this year, the little that is, coupled with anecdotal accounts from other economists convince Vest that things may likely get darker before they improve in 2003.

Vest acknowledged that, in large part because of Sept. 11, this was the most difficult forecast he's ever had to put together.

Travel and tourism has been hit particularly hard by the recession, although Tucson seems to be doing better than other resort areas in the Southwest. Las Vegas hotels, for instance, are at 60 to 65 percent occupancy at a time of year when they should be at about 95 percent full. Attendance at the annual Comdex electronic products exhibition was down from about 200,000 attendees to 150,000.

New car and truck sales led the retail sector that has otherwise suffered heavily. High-end department stores and specialty shops did poorly, down about 20 percent during post-Thanksgiving shopping, while discount and value stores were up 4 to 5 percent over the same period last year.

Tucson will do better in manufacturing than Phoenix largely because of new missile contracts coming to Raytheon. Phoenix, says Vest, will shed several thousand aerospace, computer and semiconductor jobs while Tucson probably won't see nearly as many layoffs.

Vest and Swanson agreed that the threat of global recession could lengthen the recession. Swanson says the struggling U.S. economy is now so closely intertwined with those of the rest of the world that he likens it to "recession dominoes."

Swanson says it's been an interesting year to teach economics, pointing to a year ago when the big questions were about how to spend the federal budget surplus, whether Federal Reserve Chairman Alan Greenspan would lower interest rates and what would be the impact of inflation.

The Fed has since lowered interest rates 11 times in 2001, the government is in deficit spending and the specter of deflation is at least being talked about by policy makers.

Consumers, says Swanson, will eventually carry the economy through a recession, although consumer debt is at a staggering $400 billion and banks, while they have billions to lend, would just as soon hang onto it all rather than let it out the door, "never to be seen again" through bad loans or foreclosures.

Swanson says the Federal Reserve's monetary policy can't make banks lend money to people and businesses that don't meet their loan requirements; can't force people to borrow, especially when they're already up to their necks in debt; and it can't change long-term interest rates, which follow other forces.

Vest and Swanson, however, say things could be much worse. Oil prices have fallen and drivers picked off 21 million new cars and trucks at zero-percent interest rates, both of which will put more discretionary funds into the hands of consumers. Vest also says the banking system is strong and there is now speculative bubble in the real estate market to pop, as happened in the early 1990s. Plus, Congress is boosting overall spending in infrastructure and working on new tax cuts

"Things that can't go on forever," he said pausing, "Eventually stop."


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