CNBC News Business Center December 31, 2001
Economy of 2001 in review
RON INSANA, co-anchor: Well, the new year is closing in on us, and we'd like to think about it and begin it with a clean slate. Rob Reynolds looks ahead to what we'd like the new year to bring and what we're probably going to get.
ROB REYNOLDS reporting:
So long, 2001, the year we'd all like to forget. Now what's up for 2002? Economists busily gazing into their crystal balls see the economy bouncing back a little but not popping like New Year's champagne. Mr. ROBERT HORMATS (Goldman Sachs Vice Chairman): I look for a recovery to begin sometime in the spring, but I do not look for a very robust recovery.
REYNOLDS: Don't expect Washington to help out much. Remember that economic stimulus package? Forget it.
Mr. STAN COLLENDER (Fleischman Hilliard): The chances of getting an agreement next year in an election year that wasn't able to be reached this year when you were coming off the bipartisan feelings because of the terrorist attacks just is very unlikely.
REYNOLDS: There will be plenty of extra government spending in 2002, but that's a good news/bad news deal. On the one hand, that extra spending will have some stimulative effect on the economy.
Mr. MICHAEL MORAN (Daiwa Securities Chief Economist): I think Congress will be willing to spend whatever they have to, to promote homeland security and to fight terrorism.
REYNOLDS: The bad news is it's all deficit spending. Far from paying off the national debt, the government will have to borrow a lot more. That'll push up long-term interest rates and hurt consumers.
Mr. COLLENDER: Higher mortgages, higher car loans, higher a--cr--credit cards, you know, credit card interest rates. It's a whole series of things that will have actually a negative impact on the economy.
REYNOLDS: Short-term rates are extremely low right now, thanks to the Federal Reserve's 11 straight rate cuts. But the Fed's just about out of room for more.
Mr. MORAN: There's still a chance that they could reduce interest rates in January when they meet. But if they do reduce rates then, I think it's only going to be 1/4 of a percentage point, and I think that will be the last change in monetary policy.
REYNOLDS: Economists point to other factors likely to prevent a red-blooded recovery.
Mr. HORMATS: There are still strong head winds for the economy. There's still a lot of corporate debt. There's still a lot of household debt. There are still a--a--a--a lot of areas in which there is excess capacity.
REYNOLDS: Other head winds are blowing in from overseas. Europe is in the doldrums, and Japan is mired in recession, with a whopping bad debt load crushing its banking system. The price of oil is another risk factor. OPEC plans to tighten the tap to reduce supply. Here at home, corporate America has yet to regain confidence.
Mr. LAKSHMAN ACHUTHAN (Economic Cycle Research Institute): The businesses remain on strike, and they are cutting their spending and they're cutting their employment.
REYNOLDS: The recession was led by businesses pulling back from new spending. Business investment was the weakest area of the economy in 2001.
Mr. MORAN: The big question in the economy and the factor that I think is going to shape a lot what happens throughout the course of the year is what business firms do with their investment spending.
REYNOLDS: Another big question mark is unemployment. The jobless rate jumped to nearly 6 percent after September 11th. Further erosion will hurt consumer confidence.
Mr. HORMATS: The key to 2002, if you were to identify one central factor, would be the rate of growth of unemployment.
REYNOLDS: But another factor looms over the economy and the country itself: the threat of more terrorist attacks.
Mr. COLLENDER: The most important thing going forward is that there not be a repeat of the September 11, even if it's on a much, much smaller scale. As long as the fighting is over there, Americans--American consumers are going to feel a little better about life, about where--you know, where the country is headed, and about their ability to go out and spend and invest in the future.
REYNOLDS: Even with the stunning military success the United States has achieved in Afghanistan, security experts say it would be foolish to believe that other attacks are not being plotted.
Mr. JOHN PIKE (GlobalSecurity.org): We're never going to be safe. Terrorists will always be able to find targets in America that they can attack. All that we can do is make those attacks more difficult.
REYNOLDS: With in that mind, budget experts expect the federal government to spend an additional $50 billion to $100 billion a year every year for the next 10 in order to fight the war on terrorism and beef up homeland security. Rob Reynolds, CNBC BUSINESS CENTER, Washington.
Copyright 2001 CNBC, Inc.
