Consumer Confidence, Capital Spending Expected to Stimulate Economic Growth

Article excerpt

There's an old adage which can be adopted for 1993 that reminds us that things are never as good as we hope, nor as bad as we imagine. The economy in 1993 is not expected to be as good as past recoveries but should be much better than it was in 1991 and 1992.

The new President's first one hundred days in office have clearly influenced business and consumer confidence. Officially, it is the second anniversary of the current economic recovery, and President Clinton's three-pronged attack on the deficit is timed perfectly to take advantage of the current period of economic expansion. The public's reaction to President Clinton's proposals for reduced federal spending combined with tax increases and redirected infrastructure investments will go a long way in setting the stage for the economic events of 1993 and 1994. Any major policy shifts in spending or taxes probably won't take effect until 1994, the third year of the current economic expansion. The President's campaign promise to cut the deficit in half by the end of his term will likely result in additional deficit reduction initiatives and make 1993 and 1994 a period of unusual economic uncertainty.

The spurts and false starts in economic activity over the past two years have kept a majority of analysts skeptical about the economy's ability to return to historical recovery rates. They are quick to point out that a return to such levels would require much higher employment and income growth than currently anticipated. On the other hand, the hope is that 1993 will set the stage for a return to more rapid economic growth through a combination of rising confidence, production, and income.

To a large extent, businesses and consumers are beginning to imagine a much brighter future while still guarded in their short-term outlook. Transferring this future optimism into current action will be the biggest challenge for the new administration and for the economy as a whole. If this challenge is not met, the economy will likely be mired in stagnant growth, high unemployment, and a falling standard of living well into 1994.

Economic Growth

Consensus Forecast: Growth will continue well below typical recovery rates with the rate advancing slightly above 3.0 percent by year's end. Defense cutbacks, lagging consumer incomes, and anemic growth overseas are the major constraints to achieving a higher growth trajectory. However, rising consumer confidence coupled with an upturn in capital spending should prove to be the needed stimulus to keep growth at 3.0 percent for 1993.

Bureau Forecast: Economic growth will be noticeably higher for 1993 than the consensus forecast suggests. Despite continued weakness in the commercial real estate and business construction sectors, the U.S. economy is poised for a progressively improving expansionary phase. While the economy can reasonably expect a fiscal stimulus package of approximately $31 billion from the new administration, the major engine for better-than-expected growth for 1993 will be the improving balance sheets of consumers and businesses. Business balance sheets are showing increased profitability, lower debt service, and rising stock prices. While consumers continue to whittle away at their debt overhang, their rising confidence has translated into increased spending, defying most forecasts of an impending retrenchment. With plenty of liquidity, a low interest rate, and a low inflation environment, economic growth will likely build momentum throughout 1993 and advance at a 3.6 percent rate, 0.6 percentage points higher than the consensus forecast.

Interest Rates

Consensus Forecast: Moderate growth will keep interest rates stable to slightly higher. With inflationary expectations subdued for the present, the only pressure to bid-up interest rates will likely come from the lack of a reasonable deficit reduction plan by the new administration. …