Economic Forecasting - US economy in 2001

Information Outlook, March, 2001

Each year since 1994, the staff has developed financial assumptions as an initial phase of the program planning process. In order to facilitate the process for developing the 2002 Association Program Plan and the FY 2002 Budget, staff has identified financial assumptions for the organization as well as the related programs and activities. The assumptions incorporate trends, forecasts, planning documents (i.e., the long-range financial plan), and economic outlook information received from the Congressional Budget Office, Merrill Lynch, and Kiplinger.com. The Finance Committee reviews and considers the financial assumptions in approving the association's budget.

The generic assumptions which relate to the entire organization are revealed below. Since it is difficult to make economical projections with any certainty, many of the assumptions contain expectations pertaining to 2001 and the effect of such on 2002.

Economic growth will slow in 2001, sliding to about half of the FY 2000 increase of five percent. For the year as a whole, a recession seems unlikely in 2001, as the Federal Reserve will step in with timely interest rate cuts, starting by the end of January. Lower rates would help ease some of the ills that are building. These include growing consumer debt, tighter credit, rising bankruptcies, weakness in manufacturing, and softer sales of cars and other retail merchandise. Lower rates would also breathe life into the stock market, where falling prices this year will put a crimp in both consumer spending and business investment. Stock prices in 2001 likely will match the rise in corporate profits of around 8% to 10%. In turn, that will underpin growth in business spending, which should increase about 9%. Relief will come also from a drop in energy prices after the winter heating season, providing a boost to consumers and businesses in the second half of the year and into 2002. Export growth will give a lift t oo, as companies in Canada, Mexico, Europe and China buy American aircraft, high-tech gear, and services. The biggest risk is slower growth itself. When gross domestic product (GDP) is increasing around 2.5% or less, the economy is much more vulnerable. The Urban Consumer Price Index for 2002 is projected to rise 2.7%. The AIMS Association Financial Index is projected to increase nearly 4.5%. This will relate to an across-the-board increase in operational expenses.

Congress is likely to extend its moratorium on new Internet taxes in 2001, but there is less of a chance in 2002 that lawmakers will be able to fully resolve the contentious issue of how to collect sales taxes on Internet purchases. However, states will take the lead on the sales tax question, devising and implementing a simplified collection system in the next few years. It is anticipated (or shall we say hoped) that non-profits will retain their e-tax exempt statuses at least for the short-term.

Businesses will still expand and create new jobs and recent college graduates are a natural choice to fill many of the new positions. In some cases, firms will go after new graduates more actively than in the past because other hiring strategies have been exhausted in this tight labor market. Another big reason for the college-recruitment spike is the impending retirement of the baby boom generation. According to the Labor Department's Bureau of Labor Statistics, 25 million people will leave the labor force between 1998 and 2008. All but three million of those will be 45 or older. Realizing just how many workers they will lose when this starts to happen, employers are acting now to ensure that they have enough new employees to make up for the loss of more-experienced workers. Engineering, computer science, and business majors will be most in demand, but liberal arts grads will also be a hot commodity, especially as firms realize that students with strong academic records can often perform a variety of tasks. Average starting salaries for new graduates will increase between 4% and 6% in 2001, but they could go even higher if the competition really heats up. While 45% of employers say they will use signing bonuses to attract workers, a greater number will offer incentives that enhance the work environment, such as training (74%), relocation reimbursements (69%), a casual workplace (67%), and flexible work hours (53%), according to a survey by Michigan State University's Collegiate Employment Research Institute. SLAs staffing costs will increase by 7% to 8% to fund the salary administration plan, including the upgrading of three to five administrative positions and the updating of the salary adjustment program.

The overall benefits costs will increase by nearly 10% to accommodate the needs of the varied workforce. A growing number of women in the workplace will require benefits that support their roles as primary care givers. The aging segment of the workforce will cause increases in health care and training. The younger workforce will find greater value in bonuses and technological upgrades. Employer costs for health insurance will jump in the coming year, with premium hikes entering double-digit territory. Increases of 11% are expected on average, although smaller employers are likely to face hikes of 20% or more. Similar cost increases are likely to continue for at least the next two years. The 2001 rise marks the fourth straight year of increases that exceed the rate of general inflation. The increase was 6.2% in 1998, 7.3% in 1999 and 8.1% in 2000. The average cost per employee rose from $4,097 in 1999 to $4,430 in 2000, according to a new survey of employers by William M. Mercer Inc., a benefits consulting com pany. Costs also vary by region, with the highest cost per active employee reaching $4,959 in the Northeast, $4,474 in the Midwest, $4,287 in the West and $4,129 in the South. Soaring prices for prescription drugs are the chief culprit in the return of health care cost inflation. Drugs now account for about 14% of total medical plan Cost. Employers saw an average increase in drug costs of 17.5% at the last renewal of their health plans. For 2001, the increase will go up to 20%.