Financial Update (First Quarter 2002)

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Guynn’s Speech

2002 Outlook

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Guynn Expects U.S. Economy to Return to Growth This Year

The biggest economic uncertainty for 2002, according to Jack Guynn, president and chief executive officer of the Federal Reserve Bank of Atlanta, “is not whether there will be a recovery, but when it will arrive and how large it will be.”

Guynn made his comments in a speech to the Rotary Club of Atlanta in January. Guynn said that the answers to those questions were not yet clear, but he mentioned a number of factors that should combine to provide considerable support for a significant economic recovery in 2002.

Among these, Guynn cited lower energy prices, which free up money for consumers and businesses to spend elsewhere, and last summer’s tax cut, which put additional money into the pockets of consumers. Guynn also said that lower interest rates — brought about by the Federal Reserve’s 11 reductions in the federal funds rate in 2001 — have allowed consumers and businesses to reduce their debt burdens.

Guynn also observed that, on the production side of the economy, inventories have been worked down to low levels in most industries and that production may soon have to increase to accommodate even a continuation of current demand conditions. Finally, Guynn said that, in contrast with past recessions, the U.S. financial system remains in very good shape.

Jack Guynn Callout

Guynn acknowledged that there were uncertainties too and stressed that the key to a turnaround is a renewal of business profitability. Guynn said that over the short term, businesses would likely continue cost-cutting measures since businesses have more control over costs than they do over revenues. Unemployment will also probably get worse before improving in the second half of 2002, he said.

On balance, Guynn is reasonably confident that nearly all the adjustments witnessed since the fourth quarter of 2000 will be substantially completed by midyear. Guynn said he believed that gross domestic product growth would average around 3 percent at an annualized rate for the last two quarters of 2002.

To see the complete speech, go to www.frbatlanta.org and click on “News and Events” and then “Speeches.”