Next Year's Economy: So-So

Still hung over from the excesses of the 1990s, the U.S. economy is expected to turn in a lackluster performance in 2003.

And that's the optimistic forecast from business economists. After a year in which the economy struggled for momentum, it could be thrown back into recession next year if there was a prolonged war in Iraq or another serious terrorist attack, they say.

"We're looking at a very moderate economic recovery" from the 2001 recession, said Sung Won Sohn, chief economist for Wells Fargo & Co. "That assumes that Iraq will not be a major problem, a fairly quick and decisive confrontation."

He added: "In the worst possible case, if the war in Iraq gets messy and prolonged, it could do big damage to business confidence and then we're looking at a double-dip recession."

Most economists expect the economy to grow about 3 percent to 3.4 percent in 2003, slightly above the estimated 2.7 percent growth in 2002 and 0.1 percent of the 2001 recession year. Recoveries are generally much stronger.

The forecasts factor in some limited tax cuts by Congress, ranging from reduced payroll taxes to investment tax credits. There could also be moves to extend unemployment insurance benefits.

"It's mainly symbolic," Sohn said of expected government stimulus. "It won't be so much aimed at putting money into the economy but at demonstrating to consumers and businesses that Washington is doing something to make sure the economy grows."

Consumers have been the engine of U.S. economic growth, and they're expected to continue spending in 2003.

The drag has been weak capital spending - that is, on plants and equipment for business.

"In the euphoric 1990s, we had such rapid growth in capital spending that it exceeded what the economy needed," said David H. Resler, chief economist at Nomura Securities International. "That excess investment was heavily in the technology and telecommunications sectors."

Excess capacity in tech and telecoms currently is being reduced through bankruptcies and restructurings, setting the stage for some expansion in the next couple of years.

"But it won't be close to the boom we had in the 1990s, and that's why we're projecting such a slow growth recovery," Resler said.

Another constraint on capital spending is that business confidence has been shattered by a series of corporate scandals and three years of punishing share price declines.

The millions of Americans who have lost their jobs because of corporate cutbacks don't have a lot to look forward to in 2003, warned Richard Berner, chief U.S. economist at Morgan Stanley.

"If we get 3 percent growth, it's not enough to significantly lower the unemployment rate, though it is enough to keep it from rising appreciably further," he said.

The nation's jobless rate rose to 6 percent in November as companies
continued reducing their work forces, according to the latest government
data.

Berner also believes that the imbalance in world trade is slowing the nation's economic recovery.

"There's no engine of growth outside of the U.S.," he said.

Economic weakness in Europe and other regions has hampered the growth of American exports. The recent depreciation of the dollar,coming on top of the stock market crash, has prompted some foreigners to pull their money out of America.

Berner also noted that U.S. corporations and consumers are carrying a lot of debt.

"Corporate balance sheets are heavily leveraged, and so are consumer balance sheets," he said. "Many people think these are substantial imbalances and will hobble the economy. I see them as moderate headwinds."

That's because Federal Reserve rate cuts in 2001 and 2002 have allowed consumers to refinance some of their debt at lower interest rates and companies to borrow at favorable rates.