Growing economic "risk factors" face new president

Whether George W. Bush or Al Gore emerges from the Florida election quagmire to claim the presidency, neither man can expect to receive a post-election honeymoon from Congress and outright hostility from legislators is likely depending on how embittered the two sides become as the election end game plays out.

The president, who enters with no electoral mandate from the people, may find that a deadlocked political setting is the least of his worries. Battling an economic meltdown from this position would be nearly untenable and a president wounded on both fronts could have little chance to survive into a second term.

Economic analysts forsee a U.S. economy beset by multiple "risk factors" as they look ahead into the opening years of the next administration. After eight years of tremendous U.S. economic growth it may be easier to predict a slowdown than a continuing boom, but obvious clouds show up on the horizon.

Traders on Wall Street have been spooked since August as they fret over shrinking earnings forecasts for next year. Technology stocks have been especially hard-hit, sending the Nasdaq Composite Index down nearly 20 per cent in the past three months as pessimistic earnings and profit figures came in.

Companies also are being squeezed by a tightening of credit by major banks that are pulling back their loans as a precaution against the uncertain economic conditions that loom ahead.

A recent survey of senior loan officers by the U.S. Federal Reserve found that 44 per cent of U.S.-based banks and 80 per cent of foreign banks with U.S. operations were tightening credit standards for new business loans.

Reasons for the caution "were a less favourable or more uncertain economic outlook, a worsening of industry-specific problems, and a reduced tolerance for risk," according to a statement released with the Fed survey.

Tightening credit will enhance the overall economic slowdown expected in the United States in the next fiscal cycle. The U.S. growth rate dropped from 6.1 per cent for the 12 months ending in June to a rate of 2.7 per cent for the July-September period.

The Fed is seeking a so-called "soft landing" for the economy that would pull growth rates back to about 3 per cent without sending the country in a recession or bring back the "stagflation" (stagnant growth combined with inflation) of the 1970s.

Forecasts for next year range from a growth rate of 3.4 per cent to a figure below 2 per cent, which would not send the country into a recession but would feel like a recessionary period with increasing job layoffs after the vibrant growth rates and record unemployment levels of recent years.

"In my view, we're in for something harder than a soft landing," said Allen Sinai, a lead forecaster with Decision Economics, in a recent report. "The bad news is coming in quite quickly now."

Even if a recession is avoided, most analysts predict a rash of business failures and layoffs, especially in the high-flying Internet sector which is shrinking after two years of break-out growth. One analyst warned investors to "remain on maximum alert for a global hard landing in the first half of 2001."

The next president could have trouble keeping other risk factors to the economy at bay as well, including rising oil prices and energy costs. The weekend meeting in Saudi Arabia found that oil prices would likely remain high in the forseeable future due to rising demand in Asia and growing dependence on Middle East suppliers.

Add in a major international crisis, such as a regionalization of the Israeli-Palestinian conflict, and the global economy could quickly be thrown into a steep decline that could overtake any efforts of the U.S. Fed and Treasury Department to control the situation.

The new White House occupant can take solace in two factors and may lean on them heavily. One is in the continuation of Fed Chairman Alan Greenspan, who was re-appointed to a third four-year term in 1999. The Svengali-esque Greenspan is widely considered to have guided the economy to its longest expansion in history.

The second source of assurance comes from the tremendously positive budget situation the president gains with a forecast surplus approaching a trillion dollars over the next few years - money that can be spent on economic pump-priming if times get tough.

(la/dpa)