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First Union Economic Outlook: GDP Will Stumble in Summer, but Should Regain Footing by Yearend CHARLOTTE, N.C. - The U.S. economy has just experienced six straight quarters of real GDP (Gross Domestic Product) growth better than 3%, a sustained level that's occurred only three other times in four decades. But that record pace will not be matched in the second quarter of 1998, which should show real growth between 1% and 2%, down sharply from the 5.4% reported in the first quarter of the year. This forecast of the July 31 GDP report, is part of the Quarterly Economic Outlook for Summer 1998 released recently by First Union. The report, available in full text on First Union's Internet homepage at (http://www.firstunion.com), examines the sectors that fuel and frustrate GDP growth, and it offers a look ahead at the general economic horizon. "This summer the Asian impact on our trade deficit and on the manufacturing sector will finally prove large enough to offset the continued excellent conditions in consumer spending and real estate. But we look for 3% or better GDP growth to resume by the fourth quarter," said David Orr, First Union's Chief Capital Markets economist and senior vice president. "Asia's punch can stagger some sectors, but it's not powerful enough to deliver a knock-out blow to the overall U.S. economy. The U.S. credit spigot is wide open and should support overall economic expansion despite the losses inflicted by Asia on several sectors." Employment: Manufacturing jobs are under stress, declining 29,000 in June and 53,000 in the second quarter. But outside manufacturing, the job picture is hot. Jobs are growing at a blistering 3.9% annual rate, well above the 3.2% pace of the prior three quarters. Combined with an unemployment rate of 4.5% job growth forms the cornerstone of the highest consumer confidence in 30 years. Inflation: Supply and demand reign. The message out of Asia is overcapacity, which has kept prices of goods in the United States virtually flat. Together with the 10.5% decline in gasoline prices, the drop in imports has offset the 3.1% increase in services prices and kept the overall Consumer Price Index to a 1.7 % year-to-year increase as of May. But as we move into 1999, and prices of gasoline and goods from Asia level out, the inflation headlines should be less friendly as the CPI moves toward 2.5% and maybe higher. Consumer Spending: With workers seeing 4% raises in an environment of 2% inflation, 4.5% unemployment and 20% plus stock market gains, it's not mystery that sales are surging. Income growth and job security are the lynchpins of consumer spending. But look for a little steam to come off the consumer spending engine as farmers and manufacturing workers see their income and/or job security lessen. Real Estate & Construction: Business is almost too good for Realtors and residential builders to handle, and there is no reason to expect a downturn until either the mortgage rate or the unemployment rate turns up again - neither of which we are expecting in 1998. Housing starts, at a 1.53 million annual rate are up 9% year-to-year and existing home sales at 89,000 are up 16.5%. Commercial construction is up 4% year-to-year in May after adjusting for inflation. Business Production and Profits: The operational impact of slower - or lower volume, combined with severe pricing pressure is becoming serious for many firms. Eastern Europe, Russia and parts of Latin America, along with Asia, are suffering depression, recession or near-recession, and that makes for very tough sledding for companies involved in the international trading of goods. But today just 15% of U.S. jobs are in manufacturing, so the negative impact should not be overestimated. Interest Rates: The "steady as she goes" interest rate policy that the Federal Reserve has pursued since March 1997 is unlikely to change until either the United States CPI has moved above 2% and is trending higher, or manufacturing figures turn around, giving the Fed some comfort that Asian pressures are abating. The timing of such inflection points is obviously murky, but we see it as a 1999 story, not 1998. Charlotte-based First Union Corporation, (NYSE:FTU) had assets of approximately $220 billion at March 31, 1998. -- END -- |
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