Local Fed Chief Doesn't Foresee Recession

Article excerpt

With consumer confidence falling in tandem with the stock market, some officials have begun to worry that consumer spending will soon decline and pull the U.S. economy into recession.

But Thomas M. Hoenig, president and CEO of the Federal Reserve Bank of Kansas City, doesn't think that scenario is likely to occur.

"There's a little bit of disconnect right now between what's happening in the real economy -- what I call the real economy -- and the financial (markets), especially the equity markets," he said.

Hoenig, a member of the Federal Reserve System's Open Market Committee, the key body with authority over monetary policy, said several factors have combined to support continued economic growth.

He noted that the recent recession was "quite mild," that the manufacturing sector has improved in recent months, and that industrial production is up.

"When you take all of that together, it would suggest that we will have a growing economy through the rest of this year," he said.

Current data also "suggests" that the U.S. economy will be stronger in 2003 as well, Hoenig said.

Some officials fear that the recent decline in consumer confidence will translate into a drop in consumer spending, which accounts for roughly two-thirds of economic activity. If consumer spending falls dramatically, it could take the national economy down with it.

Although he doubts that scenario will play out, Hoenig said consumer confidence is an issue that should be carefully monitored.

"People's attitudes are part of the economic scene," he said. "You don't dismiss it."

But Hoenig said falling consumer confidence appears to be a side effect of the stock market's recent performance and the impact of accounting scandals.

Hoenig said the stock market's fall is driven by "people's evaluations of earnings" following major restatements from several companies that moved billions from the profit to the loss column on earnings reports.

"The value of a stock is very much dependent upon the earnings picture for that company," Hoenig said. "And so you have all these surprises coming out with the corporate scandals, the restated earnings, and people are saying whoa."

However, he expects investors will soon return from the sidelines.

"The real issue for the market is how will the real economy perform in the future. Are we going to grow 2 and 3 percent?" Hoenig said. "And the way it's looking right now, it should."

In addition, the Aug. 14 deadline imposed by the Securities and Exchange Commission for the chief executive officers of 947 large companies to certify the accuracy of their earnings statements should also increase investor confidence, Hoenig said.

"If I were a CEO going to report this, I would say to my CFO (chief financial officer), I want this baby clean," Hoenig said. "So you're going to get some pretty accurate numbers. And to the extent that those numbers are reflective of reasonable earnings going forward, then I think that's a real plus."

The SEC order provides for criminal and civil liabilities for CEOs if regulators discover any problems in earnings statements. The SEC plans to post the certificates on its Web site.

However, if the deadline leads to additional surprises -- a "WorldCom II" or "Enron II" -- those events would probably have a negative impact on the markets, Hoenig noted.

He said new accounting laws and regulations also increase the chance of long-term stability in the stock markets.

When looking at regional prospects, Hoenig said Oklahoma's economy has benefited from increased diversification in recent years, noting the state is now more dependent on manufacturing and financial services, and less dependent upon the energy industry.

"That is good, because while you still move more in line with the (national) economy, your booms and your busts are much less accented than they were 20 years ago," Hoenig said. …

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