EconSouth (Fourth Quarter 2001)
Always Look for the Disclaimer
he disclaimer found in every mutual fund prospectus — “past performance does not guarantee future results” — should also accompany economic forecasts.
Economists are all too painfully aware that the past doesn’t predict the future perfectly. Even during economic expansions, forecasts can be imprecise, but forecasting the timing and size of a change in the economy’s direction is especially problematic. This difficulty is reflected in the fact that most professional forecasters had to make large revisions to their short-term forecasts for the U.S. economy as the developments of 2001 unfolded.
In this issue of EconSouth, rather than making specific point forecasts for U.S. gross domestic product and the like, we have tried to lay out some of the underlying factors that will determine the speed and size of the recovery the Atlanta Fed expects for the U.S. and Southeastern economies in 2002. In doing so, we have also tried to identify some of the risk factors that may come into play during the coming year.
Looking back: How we got here
Declining job security followed by actual job losses affected consumer spending too, and retail sales started to sag as the year unfolded. At the same time, state governments felt budgetary pressures in the face of declining sales tax revenues and reductions in corporate and personal income tax collections. The United States’ trading partners were also affected by the U.S. economic slowdown, and weaker economic conditions worldwide caused energy prices to decline.
Looking ahead: What to expect
For the upcoming year, a key signal of a pickup in economic activity will be revived business profitability. This development will reflect a combination of revenue growth and successful cost cutting by businesses. Over time, business profitability will lead to additional capital spending, increased demand for labor and a return to solid, sustainable economic growth for the U.S. economy.
Charting risky waters
The biggest uncertainty is not whether there will be a recovery, but exactly when and how large the recovery will be. While the answers to these questions are not clear at this time, the lower oil prices, lower interest rates and lower taxes coming out of 2001 will combine to support an economic recovery in 2002.
By John C. Robertson, assistant vice president of the regional research group