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Economic Uncertainty to Persist Until Iraq Situation is Resolved

National City Bank Economist Sees Homes, Car Sales as Continuing Growth

January 27, 2003       Leave a Comment
By: Dave Rogers

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(EDITOR'S NOTE: To put the following report in perspective, national economic expert Marshall Loeb of CBS MarketWatch has summarized current trends: 1)U.S. deficits are getting worse; 2)State budgets are in the worst shape since World War II; 3)China, with an endless supply of cheap labor, threatens us economically and militarily; 4)Corporate mergers cost jobs and mainly didn't pay off for companies; 5)Nine of 10 stock funds fell in 2002; 6)Medical costs and health insurance and utility costs are expected to continue to rise.)

If the economy is in "the soft patch" nationally, what do we on the local level have to expect?

That question was answered, in the main, by Dr. William Natcher, chief economist for National City Bank in Detroit, in a presentation to the Tri-County Economics Club on Monday, Jan. 27.

The answer: It doesn't look good, unless the threat of war with Iraq evaporates quickly.

"Once the fear disappears there will be a rapid recovery," Dr. Natcher said before a packed house of several hundred area business people at Saginaw Valley State University.

Admitting that economists are masters of the "on the one hand, but on the other hand" predictions, Natcher laid out scenarios on both sides of theeconomic equation, positive and negative; but everything, he stressed, depends on the outcome of the potential international conflict in the Middle East.

Accounting scandals, and conflicts between investment banks and their clients, have also exacerbated the uncertainty caused by the war on terrorism, he noted. These factors have precipitated a slide in the equity markets.

The main bright spots are created by consumers, who continue to buy homes and cars, motivated by low interest ratesand incentives, respectively.

"The housing market is red hot," Dr. Natcher enthused, noting that mortgage rates are about six percent for a 30-year note. Fees charged on real estate deals also have skidded lower because of increased competition between lenders and the fact that more information is available on the Internet.

Consumers have shifted from the shaky equity markets and are putting more money into buying nicer homes and cars. Home refinancings are way up also. Home prices are up $60,000 per home in the past five years, to an average of nearly $200,000,he noted. Over the past ten years home prices have risen from about an average of $118,000. Strangely, "consumer confidence is falling but people are still buying homes and cars," said Dr. Natcher, who expressed little confidence in consumer confidence polls.

Because of the uncertainty over Iraq, all of us are somewhat risk averse, he pointed out. "In industry, for example, everybody's in a wait and see mode before making a commitment to increase production," he said. Weakness persists in capital goods orders. Unemployment is six percent and is considered stable at best.

Blips in January provide some hope, Dr. Natcher noted. There was a small pickup in manufacturing, and productivity continues to rise and is at record levels. "This isn't good for the labor markets, because fewer employees are needed, but it is a definite plus for the economy," he opined, adding:

"If we could get through the Iraq situation, we could see more improvement in the economy."

The economist made three predictions for 2003: 1) Interest rates will remain accommodative; 2)Fiscal stimuli will help; and 3)Timing is everything.

He forsees an economy, "not robust, but steady," warning: "consumers can't continue to prop up the economy like they have for the past year and a half." For example, he said the home refinance market may flatten because "homes can only be refinanced so many times" and the auto market faces potential saturation when incentives reach a point of diminishing returns.

Although the dollar is down against the euro, the U.S. economy is still strong and is a better investment than other countries, he said. However, if China and Japan dump their U.S. assets, the situation could change for the worse, he said, noting that those countries need their U.S. markets badly.

A recent wave of corporate fraud will produce "the most accurate financial accounting we've seen in a while," and "a more transparent system of full disclosure," according to Dr. Natcher, who commented: "Maybe something good will come of all this; corporations are putting everything on the table and regulatory agencies are getting more involved."On President Bush's fiscal stimulus plan, Dr. Natcher sees the only short term benefit from the lowering of the tax on dividends. "That will boost confidence," he predicted, concluding: "There are no short term fixes in the plan."



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Dave Rogers

Dave Rogers is a former editorial writer for the Bay City Times and a widely read,
respected journalist/writer in and around Bay City.
(Contact Dave Via Email at carraroe@aol.com)

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