Economic Limbo?

The economic news got bleaker in December as government economists released final numbers for third quarter 2001 gross domestic product that showed growth dipped 1.3 percent for the quarter instead of the 1.1 percent the Bureau of Economic Analysis predicted earlier. Job losses mounted as the Bureau of Labor Statistics reported a jump in the unemployment rate to 5.8 percent in December. Personal income fell in November by .1 percent for the third such drop in a row, and new orders for durable goods decreased by 4.8 percent in November.

But within the negative numbers were some positive signs that the recession may have run its course. And consumers, while remaining wary, are mostly confident that the recession has bottomed out and expect a recovery to begin this year. First, the Federal Reserve cut interest rates again in December, slashing its federal funds rate to 1.75 percent. Last year at this time, the federal funds rate – the interest rate Federal Reserve banks charge other banks for overnight loans – stood at 5.5 percent. Inflation has become a non-issue with BLS showing the consumer price index at 0.0 percent in November following a -0.3 percent CPI in October.

While durable goods orders fell in November after a 12 percent gain in October, minus the transportation component orders actually increased 1.1 percent in November, according to Census Bureau numbers. Minus transportation products, orders increased in October by only 2.9 percent, but it still shows the first back-to-back monthly gains in nearly two years. Much of the transportation orders boost in October stemmed from new car sales fueled by zero-interest deals and huge rebates. Because consumers took advantage of those deals late last year, car sales were expected to slow in the next few months.

Home sales numbers, on the other hand, are a promising sign for the economy. People bought homes in droves in November, with new home sales growing 6.4 percent, the highest one-month gain in nearly a year. Existing home sales posted a gain of 0.6 percent. According to published reports, the strong home market caught many observers by surprise.

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While jobless claims grew in December, they grew at a lesser rate than in previous months, and consumer confidence ended the year strong despite the economy’s weakness, surprising analysts.

According to the Conference Board, its consumer confidence index rebounded in December after declining “dramatically” the previous three months. The December index rose to 93.7, from 84.9 in November. The expectations index, which measures consumers’ thoughts on the economy six months down the road, rose even more, from 77.3 to 91.5. The present situation index also showed a gain, from 96.2 to 96.9.

In a press release, Lynn Franco, director of the Conference Board’s Consumer Research Center, said the December report shows, “Consumers’ short-term optimism is no longer at recession levels, and the upward trend signals that the economy may be close to bottoming out and that a rebound by mid-2002 is likely.”

According to the December survey, consumers were more positive about the job outlook, even though thousands of workers were laid off last year and the 5.8 percent December jobless rate was the highest since 1995. Those expecting more jobs to become available increased to 16.1 percent of consumers from 14.4 percent in November. Those expecting jobs to be harder to find in the coming months dropped in the December survey to 19.3 percent of consumers from 26.3 percent in November.

The reality is that the economy is still struggling. Durable goods orders in November 2001 were off 12.6 percent from December 2000. But shipments of durable goods were up 0.2 percent. Inventories declined in November for the 10th month in a row and order backlogs decreased as well, according to Census figures.