The State of the Economy

Occasionally, they'll call on folks who follow business news to help them add perspective. Given the dour mood of the equities markets and the realization that the economic slowdown that had been predicted for nearly a year was finally at hand, a news crew came calling the other day.

Other than getting my name wrong, the report was balanced but not very complete. Here's the sound bite they used from me: "Japan is in recession, Russia's in big trouble, some Latin American nations are in recession, and as those dominos fall they're bound to be felt here. If it were a nine-inning baseball game, I'd say we're in the top of the third."

Since this column gives me an opportunity to expound a bit, I'd like to share some additional thoughts -- consider it my take on the state of the national and North Carolina economies.

Earnings: The equity markets are a bearish battlefield because of earnings, and most people who pay attention to business trends saw it coming. Here's what I wrote on June 29: "The Street is bracing for (earnings) disappointments, and that could deepen the current stock market slump." This advice holds as we move forward.

Global economy: A mess. U.S. companies are losing sales overseas -- a direct hit to U.S. earnings. Only six months ago, IMF was forecasting world economic growth this year of 3.1 percent -- now it's down to 2 percent. Japan's projected to decline by 2.5 percent; Russia by 6 percent.

U.S. economy: It's good, but several factors are worrisome, and the psyche is turning negative. Consumer confidence is down for the third straight month - significantly off its 12-year high in June.

Jobs: We can expect more layoffs as companies retrench due to lost sales overseas. Gillette is closing 14 plants, laying off 5,000; here in North Carolina Nortel is laying off 750 or so. Our state remains generally in good shape, but U.S. unemployment is up from 4.5 to 4.6 percent. More alarming is the fact that nonfarm jobs are growing at their slowest pace in three years.

Growth: Slow and slower: Despite the lowest mortgage rates since the 1960s, home-building across the nation fell by 7 percent in August.

Economic development: As companies retrench, fewer projects will get off the drawing boards in North Carolina. That will give rise to even more pressure to recruit with incentives -- even cash handouts.

Farming: Already in a recession as commodities prices are at rock-bottom. President Clinton is urging Congress to help a beleaguered sector that will send shudders throughout the economy.

Entrepreneurism: The losses taken by stock investors will mean less venture cash. Already, the IPO market is essentially shut down, and going forward start-ups will find it more difficult to get cash.

The stock market: Investors have fled to bonds, and there's no reason to think they'll return to stocks over the next two quarters. You will see a rally here and there, but the bull will not roam again until we get proof that the economies of Japan, Russia, Latin America are turning around and that earnings of U.S. and North Carolina companies are trending upward.

Even the good news is mixed with bad: The Fed rate cut will help, but it wasn't enough to convince investors. I expect to see the Fed bring down rates even further over the next two to three months, and this will free up cheaper money for consumer loans. The theory is that this will boost consumer confidence, restart spending and keep our state and national economies growing.

The alternative: Dare we say recession? We're not there yet, but other nations are. Economists we listen to believe a series of two more rate cuts of 1/4 percent are needed, and that would be enough to keep the U.S. out of recession in 1999.

Have a prosperous week. Dale Gibson is a Raleigh-based journalist who publishes The Gibson Report, a weekly electronic newsletter focused on North Carolina business. Questions or comments may be directed to him by e-mail at dale@gibsonreport.com or by phone at 919-834-1033.