Economist optimistic about second half of 2001

Northwestern Financial Review, Aug 1, 2001 by Crews, Jennifer Goepfert

[chronicle]

Wells Fargo's chief economist, Dr. Sung Won Sohn, shed a ray of hope on the future of the economy during a press conference in Minneapolis on July 5. "The worst point in this economic cycle is already behind us," he declared.

Sohn explained that lagging economic indicators such as corporate profits and the jobless rate will continue to deteriorate, however, he estimates economic growth during the second half of the year should improve significantly from the first half, stressing such leading economic indicators as consumer confidence, the stock market and agricultural commodities, which are on the incline.

"There are three tail winds that are helping the economy move forward," explained Sohn. "The first one is low interest rates."

Sohn pointed out that interest rate cuts made by the Federal Reserve have brought down the cost of borrowing for both businesses and households, and has improved consumer confidence.

"Most encouraging to me is the consumer spending which is two-thirds of the economy," he stated. "Consumers are spending money. They are not exactly going on a spending spree, but the spending is holding out pretty well, indicating that consumers feel pretty good about the economy. The money supply has jumped; both individual and institutional investors are sitting on a little bit of cash. The bottom line is that we will see the economy improving as a result of lower interest rates."

The second tail wind, according to Sohn, is the Bush Administration's tax cut. Sohn estimates the combined effect of the rebate and the tax cut will lift economic growth by as much as 1 percentage point during the second half of the year.

"I think the timing of the tax cut could not have been better for an economy performing a high-wire act straddling between a recession and a soft landing," said Sohn.

Finally, Sohn stressed the low price of energy as the third tail wind, pointing to the drop in cost of natural gas and oil.

"In 2000, consumers spent an additional $50 billion on the higher cost of energy. That is $50 billion that we could have spent on something else. This is like another tax cut from oil producers. The lower price of energy should not only boost buying power but also lift consumer confidence."

Sohn expressed concerns for several factors that will slow economic recovery: the slump in technology,-the position of American consumers and business in debt and agriculture, and the sluggish economic condition overseas.

"One question that people ask me most often is, What can go wrong?' said Sohn. "Obviously many things can go wrong, but the primary concern that we have is consumer confidence in the face of lousy corporate profits and an increasing jobless rate. We have to watch what happens to consumer confidence. If it goes down for whatever reason, then the economy can go down with it."

According to Sohn, agriculture will continue to play an important role in the economy, particularly for the state of Minnesota and the surrounding region.

"Low prices, higher production costs and the wet spring have played havoc with farmers," said Sohn. "This means we will continue to see consolidation in Minnesota and there will be fewer farms as consolidation continues. Hopefully, the expected drop in the planting of corn and soybeans will bring higher prices and could be a relief for Minnesota farmers."

Sohn was quick to point out that the United States has gone through a number of tough agriculture years due to extremely good weather, not only locally, but abroad, stating that good weather brings down commodity prices. One year of bad weather could boost commodity prices as export demand rises and surpasses the supply. He also called the dairy industry a "bright spot" for agriculture, as production has fallen but the demand has remained strong.

"Overall," Sohn concluded, "we expect the federal government to continue to provide subsidies, both regular and disaster payments, and this will become an important source of income for Americas farms. By the time you include Uncle Sam's payments and you look at the farm income not only for America, but for Minnesota, the farm income is really not that bad."

By Jennifer Goepfert Crews