ECONOMISTS: ’96 COULD BE STORMIER

Byline: Carol Emert

WASHINGTON — As lackluster as 1995 has been for much of the fashion industry, retailers and manufacturers may look back on this year with nostalgia as they slog through the general economic slowdown expected in 1996.
“Nineteen ninety-five was up and down, with strong first and third quarters and slower second and fourth quarters,” said Robert Barr, deputy chief economist with the U.S. Chamber of Commerce. “On the other hand, 1996 will be a middling, kind of nondescript economy” characterized by consistently slow job growth and consumer spending that merely “limps along,” he said.
Not only is the economy likely to be sluggish, but the apparel industry is widely expected to continue underperforming relative to other sectors, according to those interviewed.
“In the apparel industry, the problem is prices; people are buying lots of units of apparel, but prices are getting lower because there are so many stores supplying it,” said Ira Silver, chief economist with J.C. Penney Co. “Until there’s more of a shakeout in the industry, prices aren’t going to start firming,” he added.
Growth of the economy overall as measured by gross domestic product is expected to slow to about 2.6 percent in 1996, compared to 3.3 percent this year and 1994’s robust 4.1 percent growth, several economists said.
Personal consumption spending is expected to mirror the slowing economy, dropping to 2.4 percent growth in 1996 from the 3 percent increase forecast for this year. And the unemployment rate is projected to edge up to an average of about 5.8 percent next year, compared to 5.6 percent this year.
In the business world, the growth rates of industrial production, capital spending and inventory levels are all expected to decline in 1996 as consumer demand subsides, noted David W. Berson, president of the National Association of Business Economists and vice president and chief economist at the Washington mortgage firm Fannie Mae.
As is typical during periods of economic languor, inflation is expected to remain at bay. Economists forecast Consumer Price Index increases of approximately 2.9 percent in both 1995 and 1996.
The braking of the economy can be traced in large part to growing competition both domestically and abroad. Inexpensive international labor markets are keeping wages down at home, particularly among low and middle income families, said Irwin Cohen, chairman of the trade, retail and distribution group at the accounting firm Deloitte & Touche, New York. Meanwhile, consumers continue to pile on debt.
At the same time, thinning corporate profit margins and intense business competition are encouraging companies to keep their staffs lean. To top it off, federal spending is likely to continue dropping, the economists said.
The moods of consumers are expected to reflect these conditions. “My guess is that it will be a more uncomfortable period, more like 1992 and 1993 than 1994,” said Barr.
But not all of the news is bad. On the up side, both long- and short-term interest rates are falling, and the Federal Reserve is expected to cut its lending rates at least once over the next year. The economy will also get a boost if the White House and Congress can agree on a plan to cut the federal deficit.
Strong growth in exports is also likely to continue as the economies of major trading partners such as Mexico, Europe and Japan slowly improve, and the stock market is also expected to continue its upward trend. These factors should help offset some of the anticipated declines in both corporate and personal spending, several economists said.
But Maureen Allyn, chief economist with Scudder, Stevens & Clark, a New York investment firm, took a more pessimistic view of next year’s economy than the other economists interviewed. Comparing current economic conditions to those that precipitated the 1990-1991 recession, Allyn is forecasting negative growth in the second half of 1996, pushing the annual GDP increase to only 1.2 percent next year.
“Debt service payments are rising, so if income slows down and people start losing their jobs, I think you get very quickly to where the debt burden was in 1989 and the early 1990s,” Allyn said. “Usually consumers go through these things without any problem, but debt becomes dangerous if income slows down and employment drops off.”
The fastest-growing forms of consumer debt are those that carry the highest interest rates, mainly credit cards, Allyn added. “There’s already been a huge surge in personal bankruptcies in the last year,” similar to the early Nineties, she said.
Allyn’s analysis also focused on a sharp decline in the growth of newly created jobs, which has steadily slipped to an annual rate of about 1.5 percent from 1994’s booming 3.5 percent growth. Citing layoffs at companies such as AT&T and 3M, Allyn said, “My guess is it will slow down even further, maybe to close to zero.”
Allyn forecast that the unemployment rate will jump to 6.3 percent next year and the consumer price index will fall below 2 percent, while growth in consumer spending will plummet to 1.4 percent for the year. “Consumers have never been this indebted, and there’s no hope of any offset on the fiscal side” through greater government spending, she noted.
Despite the dour outlook, Allyn said, she expects the economy to quickly move back into growth mode after the expected round of layoffs.
“The big difference now and in 1989 through 1991 is that now we don’t have much corporate leverage, so companies are in quite good shape,” she said. “And the U.S. is still fantastically competitive, so to the extent that there is global growth, we’ll get more than our fair share of it. Plus the Fed still has a lot of ammunition…and we may even get a tax cut” from Congress.
Those factors should lead to a “good, healthy recovery” in 1997, Allyn projected.
— Fairchild News Service

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