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Pessimism reigns in area economic outlook
By Mark Zdechlik
Minnesota Public Radio
December 13, 2001
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Economists with the Federal Reserve Bank of Minneapolis are predicting sluggish economic growth next year. That's one finding of the Minneapolis Fed as it unveiled its annual year ahead outlook. The bank's reserachers say unemployment will rise and personal income will likely fall around the region in 2002. Fed researchers also released the results of a survey of regional business leaders, the majority of whom are much more pessimistic going into 2002 than they were last year at this time.

Regional Economist Toby Madden
Regional Economist Toby Madden said he expects continued economic softness around the country and in the Upper Midwest next year.
(MPR Photo/Mark Zdechlik)
 

The Minneapolis Federal Reserve Bank covers a six-state region across the Upper Midwest. At the end of every year the bank invites reporters into its highly secure downtown Minneapolis headquarters to talk about economic expectations for the coming 12 months.

Regional Economist Toby Madden said he expects continued economic softness around the country and in the Upper Midwest next year.

"For the economy of 2002, expect little economic growth, looser labor markets, little wage and price pressure and lots of uncertainty," he said.

Despite the relatively weak overall conditions, Madden says home construction will be brisk - driven largely by low interest rates.

The Fed also released the results of a survey of regional business leaders. A little more than 320 of the 1,000 questionnaires sent out were returned. Madden says respondents generally had lower expectations for 2002 than a year ago, from the the prices they'll charge to the number of people they'll employ.

"Business leaders, themselves, are uncertain about how to project forward. One comment we received on the business poll, (was that) in 25 years of planning, this is the worst, the most difficult year we're facing in trying to figure out what kind of sales and investment we should have next year," he said.

Last year, three months before the economy slipped into recession, Madden says his office's forecast was too optimistic.

"There's always uncertainty with these forecasts. You should always take them with a bit of a grain of salt. But in this environment, the uncertainty is even greater. "

- Art Rolnick, Minneapolis Federal Reserve

Well Fargo Chief Economist Sung Won Sohn, who last year put the odds of the economy going into recession in 2001 at 40 percent, says this year the Fed may be too pessimistic.

Sohn sees the economy poised for recovery, possibly as early as the first quarter of 2002. He says that's thanks to the Fed's interest rate cuts, a plunge in energy prices AND the likelihood of a federal economic stimulus package.

"The low interest rates we have seen so far this year will boast economic growth by as much as 2.5 percentage point in the year 2002. Fiscal policy/economic stimulus package from Congress - what I call an economic Viagra - that's going to add another .1 to economic growth and we also calculate that the lower cost of energy is going to add as much as $100 to $150 billion to the economy's buying power, and that's a lot of money," he said.

But predicting the economy is a difficult, some argue impossible, job even in normal times.

Minneapolis Fed Vice President Art Rolnick says in light of September's terrorist attacks, the war in Afghanistan and the threat of more attacks, looking ahead this year is particularly difficult.

"There's always uncertainty with these forecasts. You should always take them with a bit of a grain of salt. But in this environment, the uncertainty is even greater, obviously, with 9/11. We had something far outside our political and economic experience," according to Rolnick.

Rolnick does say experience indicates the economy isn't likely to improve markedly until the war situation in Afghanistan comes to some resolution.

More Information
  • Minneapolis Federal Reserve's 2002 outlook