2002 forecast: Economy gathers strength for '03

At least, that's the expectation among economists who foresee the nation climbing out of its recession. Corporations, after all those layoffs, will see their profits increase. Better profits should help the stock market.

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And higher stock prices may give the consumer some solace and the chance to help spend the US back to prosperity.

"We'll be headed in the right direction. We'll be coming out the other side," says Don Straszheim, head of Straszheim Global Advisors in Westwood, Calif.

Exactly when this will happen is any economist's guess. Some think it's already in progress. Others think it won't happen until late this summer.

How strong will it be? Many economists see a slow year, with momentum building for '03. Others think that things will be going so well by summer that the Federal Reserve Board will have to tighten interest rates to try to keep the economy in check.

But no matter what happens, it's generally agreed the economy still faces some major challenges:

• The global economy is now deteriorating. European economies are running a few months behind the US, which means most are approaching a recession, while the US may be moving out of it. There are also few signs of life in Southeast Asia or Latin America. In fact, economists are waiting for a ripple effect from Argentina's debt default.

This global slowdown is going to act like a brake on our recovery," says Mr. Straszheim.

• The unemployment rate - now at 5.7 percent - will continue to rise.

How much over 6 percent will it go? The consensus is for an unemployment rate topping out near 6.5 percent. Layoffs will continue as companies try to become profitable in the face of relatively weak demand. "We track downsizing announcements, and we're still seeing heavy planned cuts," says John Challenger of the Chicago outplacement firm Challenger, Gray & Christmas.

The worst-hit areas, he says, are in manufacturing - automotive suppliers, steel companies, and chemical producers. But he says more layoffs are coming up in telecommunications, and perhaps in retailing.

Yet there is another side to this jobless picture: With corporate America on a "just on time" manufacturing schedule, companies will be recalling workers to fill orders when the upturn begins.

• The debt burden will keep consumers from becoming big spenders again.

The nation's IOUs are now at their highest level since the late 1980s. "We are so debt-ridden that spending will have to be cut back," says Asha Bangalore, an economist with Northern Trust Co. in Chicago.

At the same time, the '02 economy should show some gains.

Corporate profits for the Standard & Poor's 500, a broad group of companies, could rise 25 to 35 percent, says Sung Won Sohn, chief economist for Wells Fargo Banks in Minneapolis. However, this gain comes after profits shrank 30 to 35 percent in 2001. "Unless the economy really falls apart, it won't be that difficult to see double-digit gains, up from huge losses," says Mr. Sohn. In at least one good way, the new economy may resemble the old one. Last year, the housing market ignored the recession, as Americans took advantage of falling mortgage rates. This is expected to continue. Last week, for example, the government reported both new-home sales and existing-home sales sold well in November. The trend carried into December, helped by warm weather, says Dave Seiders, chief economist at the National Association of Home Builders in Washington.

He expects the housing market to improve steadily throughout the year. "Housing is standing tall," he says.

With the housing market strong, Mr. Challenger says demand is also strong for mortgage bankers, as well some other financial services such as insurance and bond trading. And the demand goes beyond white-collar jobs, to carpenters and other tradespeople.

As the new year begins, he also sees job opportunities in the healthcare industry, biotech companies, and pharmaceuticals. In addition, the defense industry, which is feeling the benefits of more spending in Washington, will be hiring.

The federal government will also be hiring more air marshals and new airport security guards while local governments may expand social services to help the unemployed and add teachers needed to replace retirees.