By IRWIN M. GOLDBERG
Consumers have driven the economy in recent years thanks to increased buying power from low interest rates, low inflation and tax cuts.
But the fate of the United States’ economy now rests with the business community, which, up to now, has been very frugal, said Sung Won Sohn, chief economic officer and an executive vice president with Wells Fargo Bank.
Sohn, speaking at the Wells Fargo Economic Outlook 2003 at The Westin La Paloma Resort & Spa yesterday, said there is some good news: The United States appears to be close to victory in Iraq; there have been no recent terrorist attacks on American soil, the geopolitical risk is less and oil prices are down (mirroring the trend seen during and after the Gulf War).
And, despite losses in the stock market, Americans as a whole are doing well, with more net worth tied up in their homes than in their portfolios.
The median wealth breakdown – the point at which there are an equal number of people below and above this line – of United States residents as $34,000 in stocks, $122,000 in a primary residence and $80,000 in a secondary residence or vacation home, Sohn said.
“The average American is better off in terms of net worth despite the setback in the stock market and that is why they are spending money. In the history of the United States, we’ve never had this much cash.”
Federal Reserve Chairman Alan Greenspan has tried to make it tough for consumers to hold on to that cash by lowering interest rates.
Refinancing has let Americans use their homes as ATMs, he said.
But we are in a jobless economic recovery because businesses aren’t hiring or buying equipment. “The U.S. has lost more than 2 million jobs in the last two years,” Sohn said. “Even excluding war, the economy has been pretty soft.”
Businesses aren’t spending money because, “they’re shell-shocked,” he said. The “average person on the street is not affected by the stock market, businesses, CEOs and companies are . . . they have stock.”
If companies have cash, they are paying down debt, not hiring more workers or purchasing new equipment. Once they start doing that, we’ll see the economy start to turn again.
“High-tech spending is starting to turn and we’ll see companies start to replace computers and equipment. I think you’ll see business start buying more equipment and hiring people” as confidence returns, Sohn said.
He forecasts mild economic growth of about 1 percent in the first quarter and 1.5 percent in the second quarter. The second half of the year will get better, he said, with 3 percent in the third quarter and 3.8 percent in the fourth quarter.
“We shouldn’t look for a barn burner, strong economy,” he said.
This is because the end of the war against Iraq won’t eliminate all the problems.
There is still the cost of occupation and rebuilding Iraq, the possibility of terrorism on U.S. soil, lowered popularity of America around the world and the loss of business in those countries and the threat of North Korea.
On the positive side of a bad thing, if the severe acute respiratory syndrome outbreak in Asia gets worse, Sohn said some manufacturing may move from China to the United States.