They are Patrick Arnold, director of labor market analysis for Maryland's Department of Labor, Licensing and Regulation; Anirban Basu, economist with the Regional Economic Studies Institute at Towson University; and J. Patrick Bradley, senior vice president and director of economic and investment research, Mercantile-Safe Deposit & Trust Co.
Let's start with the country. Pat [Bradley], how did the national economy do last year?
Bradley: If you just looked at the overall growth rate of the economy for the last year -- and that was somewhere between 3.5 and 4 percent in inflation-adjusted terms -- if you just looked at that number, you'd have to say the economy had a pretty good year. There was good consumer spending, continued job growth, a low unemployment rate, a favorable equity market. But when you start to break that number apart, you see that the economy was really a study in contrasts. A very strong domestic economy. A very weak export economy. And that was really the tale of 1998.
Pat thinks national gross domestic product growth for '98 will be between 3.5 and 4 percent. Anirban, how does that square with your projections?
Basu: That's absolutely in line with our own projections. We think the fourth quarter of 1998 is going to come in around 3.3 or 3.4 percent, which means that the year will end up at 3.6 or 3.7 percent.
For people who don't think about this stuff every day, how good is 3.6 percent?
Basu: It was another good year. In fact, a terrific year. As a rule of thumb the long-run growth rate of the United States is around 2.5 percent. Actually, coming into this decade, some economists suggested that it was more around 1.8 to 2 percent. So if you think about 3.5 percent, that's quite impressive.
Pat [Arnold], your observations on U.S. growth?
Arnold: I think it's going to end up between 3 and 3.25, real GDP.
Arnold: For '98. For '99, I see it shrinking considerably. I think it will be in the 1 to 1.5 percent range for inflation-adjusted growth for the nation.
Pat [Bradley], what's your projection?
Bradley: I think growth in '99 will be 2.5 to 3 percent.
Basu: We're between 2.5 and 3 percent also. The reason is, a lot of the forces that were at work coming into 1998 are really at work coming into 1999. Coming into 1998, economists correctly predicted that the Asian crisis might have a positive effect on the U.S. economy by moderating interest rates. Well, that's exactly what has taken place. And the U.S. consumer continued to spend in 1998. For 1999, we have similar phenomena at work. The manufacturing sector is actually in recession, according to the purchasing managers' index, and we have a very poor outlook for manufacturing. And we've already seen in Maryland numerous companies announcing layoffs.
And we think we're going to see many more layoffs this year in Maryland. That's bad on one hand. On the other hand, it suggests that the Federal Reserve probably will not tighten in such an environment and that we'll continue to have favorable interest rates.
You think the Fed might loosen interest rates?
Basu: I don't think they'll loosen right now.
But during the year?
Basu: There are countervailing forces. On the one hand, you have tight labor markets. You have a stock market that continues to return perhaps in excess of what it should, given corporate earnings. But then again, you have a softening manufacturing sector, and you probably will have some softening of other portions of the economy as well.
Pat [Bradley], do you think the Fed will lower interest rates this year?
Bradley: I think they will loosen one, maybe two more times.. Not because I think it is necessary, but I think they'll take an insurance policy out.
Pat [Arnold], you're a little more pessimistic than these guys for the national economy this year. Why?
Arnold: I think the estimates that we heard from the other two participants reflect a year in 1999 that's too much like 1998. And I think that, at least in the third and the fourth quarters of 1999, nationally, we will see a slowdown.
What's going to cause that slowdown?
Arnold: I think the consumer will keep the momentum going into 1999, but by the third and fourth quarters, I think spending will retreat.
Is that a result of the growing consumer debt and low personal savings that everybody is worried about?
Arnold: That and a slowing of income. We already have a very low savings rate. It's been noted that one of the reasons consumption has been as high as it is -- higher than you would expect from income levels -- is that people have been living off equity, off capital appreciation.
From the stock market?
Arnold: From the stock market. Cashing in their holdings, or by feeling good about their holdings and spending from other sources.
Is a consumer retreat the main threat in 1999?
Arnold: It's an important challenge, but there are other factors that would contribute to a slowdown, if it does occur.
What are they?
Arnold: Receding profits. Higher cost of capital appreciation, which will result in less of it. And despite the low inflation, I think there will be some upward wage pressure on businesses.
You haven't mentioned one aspect that I find interesting, which is business investment. Anirban, what's the outlook there?
Basu: Business investment has been absolutely robust, particularly in communications and computer equipment. I think business investment will continue to be very robust, very rampant, because business investment is considered so much a part of a successful company, in particular having access to cutting-edge technology, having the ability to share resources across various departments, various locations.
Your forecast, Pat [Bradley], implies a more active consumer this year than not.
Bradley: It's a slower rate. Consumer spending is going to slow down. But while I hear about layoffs, income growth is still relatively robust. Even with the layoffs, what happens to the unemployment rate? It probably does very little.
What about Asia?
Bradley: I'm starting to warm up to the case that maybe we've hit the low ebb, at least in East Asia, and that maybe we're starting to see a turnaround.
Pat [Arnold], I wanted to ask you about Asia as well. As dire as it was, it didn't have the domestic effect last year that everybody thought it would. So I guess there are two variables: How bad is Asia going to be this year, and what's going to be the effect here?
Arnold: The Asian situation is still relatively serious, but I don't think it's going to get worse. Any optimism about a recovery in that group of countries would have to be based on hope alone. But if the situation stabilizes, and I think it will, then I think the U.S. economy can weather another year.
Basu: Much evidence pointing to the notion that these East Asian economies have in fact bottomed out is good for the U.S. economy. Good for exports. I still think 1999 will be a poor year overall for exporters because the first half of the year is gong to be so bad.
Pat Bradley, I keep thinking that the dollar has got to slip a little bit against international currencies, and maybe that would give some relief to exporters.
Bradley: The dollar has slipped. As of this morning, we were at 111 yen. When the Fed intervened (by lowering interest rates), it was closer to 150. My sense is that, given the trade deficit that we're runing, given the demand for external financing of that trade deficit... that the dollar's going to weaken. And I think that holds some potential issues for interest rates as well, as foreigners decide that, "We're holding enough dollars at this exchange rate."
You're saying foreigners will sell U.S. bonds and that will raise rates?
Let's talk about interest rates. Do you think mortgage rates have any downside this year? And what about business borrowings?
Bradley: My sense is that mortgage rates over the first half of the year are in more of a trading range -- a quarter of a percent one way or another, around where we are right now. But as demand continues to increase for housing, that will probably tend to put some pressure on mortgage rates later this year. It's hard for me to think we could see a further decline in interest rates.
Pat [Arnold], what do you see consumer and business borrowing costs doing this year?
Arnold: I think they will remain very stable. I can imagine them inching upward toward the end of the year.
Thirty-year mortgage rates now are around 7 percent. The prime rate is 7.75. So you guys see them staying close to those figures?
Bradley: Again, I'd say a quarter percent on either side through the first half of the year, and then reassess at that point.
Anirban? Long-term rates this year?
Basu: We have to really study what happened last year with interest rates. One thing that happened was, when the stock market ran into some bumpiness, there was a tremendous flight to quality (in bonds). And my guess is that the stock market will continue to be bumpy this year, and we will suffer some adversity at various periods. And we will go through these phases of flight to quality. Well, what does that mean? That means that interest rates will continue to be favorable, because the underlying assets, namely the bonds, will be in high demand.
But what's going to cause this bumpiness? As I recall, crises in Asia and Russia were the bumps last year. If Asia has bottomed out, what will this year's shock be?
Basu: I think we may get some disappointing earnings. We'll really start to get a sense of the weakness in manufacturing. The other thing is that some of these companies are so highly valued at this time -- a company like Amazon.com -- a lot of those stocks may be hard hit when investors realize that the earnings just are not going to be there going forward.
Bradley: I don't think there's any lack of risks out there. That's one area -- risk -- that we need to keep an eye on, whether it comes internationally or whether there's some kind of domestic shock. And that's important for all consumers, businessmen and investors to realize.
Pat Arnold, what kind of year did Maryland have and what are we looking at going forward?
Arnold: We had a great year by comparison. After revisions are made to our employment estimates, we'll have a 50,000-plus year in '98.
Fifty thousand-plus job growth.
Arnold: It's going to represent over 2 percent and perhaps as much as 2.3 percent growth. Ninety-nine, I believe, will mirror '98 essentially, although I think it will be slightly lower, perhaps between 2.1 and 2.2 percent growth.
How does that compare with job growth in the country?
Bradley: With Maryland at 2.1, 2.2 percent, it looks like we'll be at the national average or a little better.
Basu: I think it's actually going to be less. I think the nation will probably end up at about 2.5 percent. Maryland will probably end up at about 2.2 percent for the year. We'll probably rank about 22nd or 21st (among states) for 1998. And we think 1999 is a slowdown year for Maryland.
Basu: We think it will be noticeable. We forecast between 1.4 and 1.8 percent employment growth, down from 2.2 percent last year.
What's causing that? Why are we slowing down?
Basu: It's a couple of things. While we're not a manufacturing-intensive state -- it only represents about 7 percent of our employment base -- I see a lot of consolidation there that will eliminate a tremendous amount of jobs. And the multiple of those jobs is high.
You mean the economic multiple.
Basu: Yes, the employment spinoff effect. And also I see a tremendous amount of consolidation taking place this year in Maryland in so many industries, including financial services, communications. It's no secret. It's been happening for some time. I just think this year is going to be a really big year for consolidation and mergers. It seems like consolidation has upped the ante. Everyone's in play, and I think we'll really see that in Maryland this year.
Pat Bradley, what's your sense of the Maryland economy?
Bradley: I see us catching up to the nation. Maryland was an economy that seemed to lag the nation for a while. Now you seem to see an acceleration in consumer spending, an acceleration in construction activity. Mergers and acquisitions are still an issue in the financial services area, but for the most part that seems to have slowed down. It doesn't look like we're going to have continued contraction in federal defense spending. In fact, we're at a point in time where defense spending is going to pick up, which we could look at as a positive for Maryland.
Pat Arnold, what do you think?
Arnold: I have a great deal of respect for the logic of Anirban's forecast. But what I would like to point out is that one of Maryland's strengths here is the way it grew out of the recession. It did it gradually, and with what I consider sustainable improvement. And sustainable means that I think we can squeeze out a couple more 50,000-plus years.
How severe is the labor-availability issue in Maryland?
Basu: It's very severe. We probably in 1997 and 1998 would have added 10,000 more jobs per year if we had a nice fit between the labor force and the demand for labor. We did not have that fit. I don't think we're going to have that fit in 1999. Certainly community colleges and other educational establishments are scrambling to find ways to bring workers' skills up to date. But that's a long-term process.
Arnold: Again, I agree with the logic there. But I am pinning my estimates in part on the idea that it can be a short-term correction because of in-migration.
You mean from other states.
Arnold: Yeah. The education issues are long-term, there's no doubt about that. But I think Maryland is capitalizing on its reputation as a nice place to be.
Bradley: This tightness in the job market that we're hearing about is a reason to expect some upward pressure on wages and some solid growth in income, which ought to tie into spending growth and growth in housing investment, when you couple that with interest rates as well as capital availability.
Should that make me happy if I'm a retailer?
Bradley: If I'm a retailer, I'm very happy about that. My sense is there's still pent-up demand, and this kind of wage growth will encourage that demand to be satisfied.
Well, let's talk about these jobs. Anirban mentioned Maryland manufacturers. Pat, do you agree with him that they've got some battles to fight this year?
Arnold: There are some potential pitfalls for manufacturing in '99. I think when our figures are finalized for '98 that manufacturing is going to have had a surprisingly good year. But I don't discount the risk and caution.
Bradley: You don't want to ignore such good old-fashioned supporters of growth as tourism, either, which continues to be a source of strength in the economy. Also -- and I don't know if this is a plus, longer term -- Maryland has a little less international exposure, less East Asia international exposure.
Basu: That has benefited us tremendously. If you look at our gross state product, about one-fifth of 1 percent is invested in Southeast Asia. In Delaware that number is 3 percent. So we don't have nearly the exposure that other states do.
What do you guys make of this port deal with Maersk/Sea-Land? Baltimore is a finalist to get shipping business from them that would triple the port's container volume.
Basu: That's the one thing that could trip me up. A victory there could really turn things around for 1999.
Basu: We're talking about tripling cargo through the port of Baltimore. We're talking about a second renaissance in distribution in this region, I believe, if Maersk and Sea-Land decide to operate from Baltimore. It really turns the port of Baltimore into a fabulous economic driver. Not an economic driver that holds steady, and holds together a certain portion of the economy, but one that really drives growth. The thing about these distribution jobs is, they're quite high-wage. They're quite technical in orientation. And they have a lot of spinoff benefit.
Well, how many jobs are there? My sense is that it would all be done with robots, and there'd be like two guys sitting in the cranes pushing all the buttons.
Basu: The direct jobs out of the port -- it's not clear how many jobs there. We may be talking about hundreds of jobs there. But in distribution we're probably talking about thousands of jobs.
What other sectors should we talk about?
Basu: Health, certainly. One portion of health is among the fastest-growing portions of the economy, which is nursing homes and assisted-living centers, a continuing generator of good, middle-class jobs. On the other hand, we have hospitals, which will see more consolidations this year.
Any thoughts on health care, Pat [Arnold]?
Arnold: Ninety-eight was a relatively good year, employment-wise. In light of the consolidations and low occupancy rates, that can be a puzzling development. But it was a good year.
Pat [Bradley], you mentioned tourism. How important do you think that is?
Bradley: Given what we've talked about in terms of the consumer generally and the attractiveness not only of the Baltimore region's economy but the shore areas, the Ocean City area, I think we're going to see continued strong growth. As long as confidence remains high, I think consumers will continue to spend. And if you tried to rent at the shore late in August, you found out how difficult that was.
Pub Date: 01/24/99