Signs Point to Continued Economic Recovery in 2004, San Antonio Experts Say

San Antonio Express-News

Analisa Nazareno

January 10, 2004

Jan. 10--This holiday season, more employers popped open bottles of bubbly with workers and celebrated what they hoped would be the end of a gloomy fog of economic uncertainty.

Toward the end of the year, employers saw orders grow. Productivity was up by historic levels. Consumers once more were spending lots of money.

And so this year, maybe -- just maybe -- employers will even start hiring workers again.

"There are a lot of signs that suggest that it's going to be a better economy this year than last year," said Steve Green, an economist at Baylor University's Hankamer School of Business.

Economists, financial analysts, and stockbrokers locally and nationwide agree: 2004 will be a year for ongoing economic recovery.

But to what extent the economy will improve and whether employers will feel confident enough to start hiring again remain lingering questions. And though most of these forecasters are bullish about the economy, they all say that it's predicated on the idea of peace in the world and no devastating world events rocking the economy.

"All of this is contingent on there not being another shock to economy -- like, God-forbid, another terrorist attack or the King of Saudi Arabia dying and there being a revolution in that nation and gas prices increasing," Green said.

"The fact that we haven't had a terrorist attack in more than two years doesn't mean we won't ever have another one. It has taken us two years to build back the consumer and investor confidence we lost after 9-11. If we have another attack like that, that would slow the economy down substantially."

To predict the events of this new year, economic forecasters use facts about the previous year, as well as the stated intentions and plans of companies for future activity.

Last year, the data revealed a tentative national economy on the brink of a well-rounded recovery that included at least a halt in job losses.

By the end of the third quarter, the nation's gross domestic product -- the broadest indicator for economic growth -- grew at its highest rate since the 1980s, 8.2 percent.

And national unemployment figures improved marginally from September to November, falling to 5.9 percent from 6.1 percent.

"The expansion in the economy began in November 2001, and job creation didn't really begin until November 2003," said Albert Niemi, dean at Southern Methodist University's Cox School of Business.

That's been typical of the nation's most recent recessions, he said. So it's no surprise that job creation has lagged so long after the official end of this most recent recession.

"Because of the pressure on companies, they want to be sure that the recovery is for real," he said. "And the last thing they do is invest in human capital."

Niemi projects an average monthly job growth of 145,000 nationwide this year.

"The expansion and economic recovery seen during the third and fourth quarters of 2003 will increase in 2004, with strong consumer spending and job growth driving the economy forward," he said.

His colleague at Baylor was more reserved about employment figures for the year.

"The employment situation is pretty unusual right now, because we've seen this pretty rapid increase in production and haven't seen much of a decline in unemployment," Green said. "So the big question is if the economy continues to grow robustly, at what point will it translate into a lower unemployment rate."

And while Niemi is bullish on employment figures, he tempered that with some concerns about the ongoing trend of corporations outsourcing high-level, good-paying technical and financial jobs to nations like India.

"It's a relatively new phenomenon, even though we've been used to losing manufacturing jobs to Mexico and low-wage nations in Asia," Niemi said. "But now it's starting to happen with higher-skilled financial and back-office jobs moving to India. If that continues to happen, we have to worry about the long-term impact that will have on our economy."

Here in Texas, and specifically San Antonio, the local economy stayed healthier than the national average during the most recent recession. And during the national recovery for this year, the state and city will likely see modest job growth.

Last year, the city saw 1.3 percent job growth, while the state saw no such growth, said Keith Phillips, senior economist for the San Antonio branch of the Federal Reserve Bank of Dallas.

This year, Phillips said he was expecting the state's job creation to grow by 2.1 percent and San Antonio will see 2 percent growth.

"The long-term average is 3 percent for the state, so it's still not strong job growth, but will be stronger than 2003," he said.

The U.S. Chamber of Commerce is predicting that by the end of 2004, the unemployment rate will have gradually dropped to 5.5 percent. The group is also predicting GDP growth of 4.8 percent for the year.

For market watchers, positive expectations for the overall economy and the employment front also are fueling optimism for the growth of the stock market.

"For those who are stagnant on the sidelines, I would definitely consider moving a portion of sideline money into the market," said Case Gatlin, vice president of investments at Raymond James & Associates in San Antonio.

Gatlin said investors should slowly put portions of their money market accounts back into stocks and high-yield bonds this year to capitalize on the strengthening market.

But he cautioned that 2004 will likely not be the year when tech stocks "come back," despite the fact that investors were bullish on such stocks towards the end of the year, when companies were announcing plans to replace aging equipment.

"I do think we did see a little but of some hopes that the tech sector was going to lead us out of the correction and I think there was some wishful thinking," Gatlin said.

"A lot of investors, despite the volatility, are ready to jump back in there," he said. "But very seldomly does a sector that leads you into correction lead you back out. I'd still be careful with tech stocks. Tech is still our future, and we can't overlook it, but we have to do our research and dig deep before putting money."

Gatlin said that because this year will likely see higher interest rates after the Federal Reserve increases its Fed funds rate, investments in corporate bonds will likely give investors good returns.

"In a strengthened economy, corporate bonds and high-yield debt are probably more likely to be paid back," he said. "Looking at yield spreads, this will continue at least for next year. The fact that rates could be potentially rising is positive news for high-yield bonds."

Like Gatlin, Intercontinental Asset Management President Mickey Roth said that while higher interest rates generally do lead to lower bond prices, for long-term bond investors, they also equate to compounding growth in portfolios.

"The real engine that drives bond portfolios is the rate at which you compound," Roth said. "And moderately increasing interest rates have a very positive effect over time."

Roth also said he expected increased interest rates, coupled with the weakening dollar overseas, to lead to inflation by mid-year this year.

"There's going to be no way around it; imported goods are going to be more expensive," Roth said. "How much of this currency stuff [importers] can continue to eat, I don't know."

The drop of the dollar could mean increased foreign and domestic tourism in the United States, said Fariborz Ghadar, director of the Center for Global Business Studies at Pennsylvania State University.

"Assuming we don't restrict (tourists) from coming here, or that planes are blowing up over here, you're going to see them coming en masse, and Disney World will be doing really well," Ghadar said.

With Europeans and the Japanese able to buy 20 percent more as a result of the dollar's slide against the yen and euro, Ghadar said lots of them would soon be shopping here.

Like other economists, Ghadar said the growth of the economy is contingent upon relative world peace. But unlike the others, he hedged that the world this year will actually be a more peaceful place than last year.

"The Iranians agreed for much more intrusive inspections," Ghadar said. "And while I think North Korea is a little bit of a dangerous situation and they've been making noises, China is working getting together with them and working with them.

"The danger is not so much with regimes so much it is with sort of ad hoc groups that we don't know who they are. We don't know what we don't know, but the regimes are being more or less whipped into shape, and that's very positive, as well."

Plus, economists say, because 2004 is an election year, incumbent politicians will do all they can to not hamper the growth of a still tentative economy.

"Everyone from the executive branch to the people in Congress, everyone who's an incumbent, will do what they can to stimulate the economy," said Niemi, at SMU. "Election years tend to be positive years for the economy."

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