Despite Rough Spots, Economy Is Likely to Gently Expand in '94
More-confident consumers buying on credit is one sign
CAN the economy keep going and going and going like that fuzzy pink battery-operated rabbit?
Or will it run out of energy this winter like it did earlier this year?
Economists, now in the process of producing their forecasts for the new year, say the United States economy will not short-circuit this time. ``We see a widespread preponderance of positive economic data, which makes the expansion feel a lot more sustainable,'' says Sandy Batten, a senior economist at Citibank.
Among the positive signs: The automobile industry can hardly keep up with demand; consumers are buying more goods on credit, reflecting a more upbeat view of the economy; and banks are out looking for customers.
``The caution has disappeared, banks are back in the banking business,'' says Bob Dederick, chief economist at Northern Trust Company in Chicago.
Despite the improvement, the economy still has its share of rough spots. Fortune 500 companies are continuing to downsize - Xerox last week announced it would lay off 10,000 workers as an efficiency step. Economists are unsure if President Clinton's tax increase on the rich - first payments due April 15, thank you - will adversely affect buying. And the European and Japanese economies are expected to remain weak, dampening United States exports. ``These things might be bigger than we think they are,'' Mr. Dederick says.
Economists also are nervous because last year the economy - with fourth-quarter gross domestic product in high gear at 5.7 percent -
skidded to a halt right after the new year. Economists blamed Mr. Clinton's talk about tax increases and the sudden swooning of consumers.
However, economists say there will be a difference this year. ``While the economy may slow, it won't run into the wall like last year,'' Dederick predicts.
For example, taxpayers have had a full year to get used to the idea of paying higher taxes, and Congress has given upper-income taxpayers extra time to pay the tax man. In addition, consumer confidence numbers show a big change from last year.
There are also some anecdotal signs that the economy is on the right track for 1994. Just ask Donald Rainville, president of Universal Dynamics Inc. in Woodbridge, Va. The company's sales of its machinery for the plastics industry are up 35 percent this year, with a real burst of activity this fall. As a result of this order influx, Mr. Rainville has increased the company's 1994 advertising budget 40 percent and is increasing its payroll by 4 percent a week over the next six weeks. ``We are extremely optimistic,'' he says.
Maybe too optimistic. Economists do not expect this fall's economic spurt to continue at this pace early in the year. ``The more robust recent pace is ... not regarded as sustainable through 1994,'' predicts the Economic Advisory Committee of the Public Securities Association. Instead, most econo-mists expect a moderate 2.9 to 3.5 percent real growth rate for all of 1994.
Economists also are not optimistic that the nation's unemployment rate will fall much next year. The 51 economists who contribute to Eggert's Blue Chip Consensus, an economic forecast, are predicting that the unemployment rate for 1994 will come in at 6.5 percent, compared with the current 6.4 percent rate.
The rate will not come down much because many companies, even with full order books, prefer not to hire new workers next year to avoid paying fringe benefits and higher medical costs. That is the case with Taylor Machine Works in Louisville, Miss. Instead, Taylor will give its workers more overtime.
``It gives the employee a good stable feeling about the job,'' says Lex Taylor, president of the 700-person company.
Another reason for the high unemployment rate is military cutbacks. In Colorado, for example, the government is shutting down Lowery Air Force Base with its 6,000 jobs. The shutdown comes at the same time as many of the 12,000 workers building the new Denver airport will lose their jobs when the project is complete in March. The gloom is tempered, however, since the state is experiencing a migration of new residents from California.
``We're seeing a lot of start-ups,'' says George Dibble, president of the Colorado Association of Commerce and Industry.
IMPROVEMENTS in the auto industry are helping to boost confidence in Kentucky, where Ford Motor Company and Toyota have both begun hiring new workers. A business survey this fall found the state's businesses ending the year ``cautiously optimistic,'' reports Steve Bullard of the Associated Industries of Kentucky.
There are also some smiles around Iowa, says Mark Douglass, president of the Iowa Association of Business and Industry. Unemployment is running at 3 percent, led by strong manufacturing and insurance sectors.
The only cloud on the horizon, Mr. Douglass says, is uncertainty about the effects of the summer floods on farm income, which usually is equal to 5 to 10 percent of the state's personal income.
Of course the flood was unexpected. And Rainville says the only thing that could keep the economy from going and going and going is an international incident, such as a conflict with North Korea. ``That could slow us in a hurry,'' he says.