Consumer spending remains healthy in slow economy

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Recession? That was the buzz word on the lips of two economists from the Federal Reserve Bank of Kansas City, Mo., during their presentations at the 2001 Colorado Economic Forum at the Antler’s Adam’s Mark Hotel on Tuesday.
C. Alan Garner, the bank’s assistant vice president and economist, discussed the challenges for monetary policy facing the nation with 80 business leaders and prominent members of the community. Garner said he was “cautiously optimistic” about the state of the nation’s economy, with the nation not having to deal with a recession, and that the country’s inching economy still holds growth surprises.
For instance, Garner said, despite the slowdown, new homes were sold at a record pace in March. And although many people have taken money out of their savings and invested in the stock market, banks are still strong.
William Keeton, senior economist, said one of the major changes in the financial system in the 1990s was the shift by the public to move their bank deposits into riskier assets. At the end of 2000, Keeton said, about 36 percent of total households invested in mutual funds and equities, including 401 (k) holdings. Bank deposits accounted for about around 10 percent of the households’ total financial assets. Also, growth in deposits has declined in Colorado since 1998, dropping from approximately 8.5 percent to 5.5 percent in 2000. Keeton said this movement out of deposits caused vulnerability in the economy.
And even though consumer confidence is low, consumer spending is still healthy. Garner said consumption is two-thirds of the economy and people should pay attention to that number, because if consumer spending starts to dip, then the economy could really take a hit. “I’d be worried,” he said.
“Growth has slowed in economic activity,” said Garner. “But is hasn’t dropped off a cliff. The worst is the uncertainty we have about the future … and fears of a recession.”
Garner predicted that the economy would ease 2 percentage points and with that “the chances for a recession will diminish” in upcoming months.
Sluggish activity will mark the second quarter with a 1 percent to 2 percent economic growth rate, and the public might see an upward creep of growth in the 2 percent to 3 percent range at the end of the year.
The prediction is based upon the easing of monetary and fiscal policies — such as tax cuts — in the future, which will help increase spending. The many layoffs, especially in the manufacturing industry, are indicative of inventory adjustments to demands in the market. Businesses will eventually return to more stable outputs, Garner said.
He also predicted the high tech industry would slow and stabilize.
“Some suggest the high-tech industry has excess capacity and we don’t know how this area will be affected over time,” he said. “Our concern is with the pace of technological change; it will slow or people will not buy products.”
Garner cautioned that Fed economists aren’t experts at predicting how a field will sway, but his take is that new technology is still essential for productivity of business operations, and that wireless applications and the Internet will remain strong.
However, Garner dished out some cautionary pessimism with his optimism.
“I suppose the day will come when the industry trend for high tech will slow in the future and they’ll behave like other durable-good industries, like the auto industry,” he said. “It is somewhat inevitable.”
Unemployment will still plague the nation throughout the year, he said, possibly with rates as high as 4.5 percent to 5 percent by the end o the year.
“Historically, that’s pretty low,” he noted.

Financial changes
Keeton, who spoke about “the new financial system,” said another major change in the financial system in the 1990s was the consolidation of the banking industry and increased access to capital markets.
Assets acquired in bank mergers near the end of 1998 were approximately $600 billion, which is the highest it has been since 1980. The mergers resulted in increased multi-state banking. In 1990, 20 percent of banking in Colorado was controlled by out-of-state banks and in 1995 that number rose to 60 percent. It currently stands at 57 percent, significantly higher than the national average of 43 percent
One impact of bank consolidations was the effect on loans to small businesses.
“Small-business lending does decline when acquisition of a bank is by a larger bank,” said Keeton. “It would appear to be bad news, but … smaller banks experienced double-digit growth in the past; at least 20 percent in business loans when a merger has occurred.”
In 1993, Colorado had 8 percent growth in business loans at small banks with organizations that were under $1 billion in size. The second peak of growth was in 1995 for the state at approximately 18 percent and yet again in 1999 when it was approximately 23.5 percent.
This positive outlook is still shadowed by the public shifting to mutual funds and stocks instead of banks.
“As the public shifts, banks will have a hard time with funding loans,” he said. “And the shift in investments has hurt big bank businesses.”
Venture capital firms may have a difficult time getting financing to start-up their business and because most rely heavily on the stock market, it can make times more difficult for businesses. Colorado venture capital investment in the first quarter 2000 was a little more than $0.6 billion while the NASDAQ was above 4,000; in first quarter 2001, the capital fell to $0.4 billion, while the NASDAQ was a little under 2,500.
Keeton said the road to recovery will be bumpy, “but that’s the price we pay for the accelerated rate of business.”