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5/29/2003

Economist: Recovery still has obstacles

By Pam Mellskog
The Daily Times-Call

BOULDER — Terrorist attacks, back-to-back wars and SARS have all hobbled economic recovery in the U.S., according to Wells Fargo’s chief economist, Dr. Sung Won Sohn.

Approximately 100 Wells Fargo bankers and well-heeled bank clients attended Sohn’s Hotel Boulderado breakfast presentation Wednesday for his discussion of the four top economic risk factors — deflation, stock market setbacks, the housing bubble and the tenuous geopolitical situation.

“I’ve been in this business a long time, but I’ve never seen this much uncertainty,” said Sohn, who from 1973 to 1974 served then President Richard Nixon as a senior economist on the President’s Council of Economic Advisors.

The risk factors, he continued, directly relate to structural weaknesses on the economy’s consumer and business sides.

On the consumer side of the equation, record high consumer-debt ratios, consumer loan delinquency rates and shaky consumer confidence have hampered recovery, he explained. And no where is the consumer loan delinquency rate higher than in the Midwest, where industrial manufacturing jobs have been lost at major hubs such as in Chicago and Gary, Ind.

That sector, he said, has historically pulled the country out of deflationary cycles, something the United States has experienced just three times — after the War of 1812, the Civil War and World War I.

Manufacturing always made deflation a lot easier to spread, Sohn explained. But with 85 percent of today’s U.S. gross domestic product coming from services, falling back on that will not be the answer this time.

“For 60 years, we have been fighting inflation. All of a sudden we are fighting deflation,” he explained. “And deflation is kind of like SARS. You want to be about 10,000 miles away from it. ... In the final analysis, we need jobs.”

But it could be much worse than the current national 6 percent unemployment rate, he said. In 1982, for instance, joblessness hit 11 percent nationally.

However, to weather the aforementioned risk factors, many companies have frozen hiring and laid off workers, postponed buying equipment and slacked on rebuilding inventories until the sun shines again.

While those responses have given corporate profits a boost, a long-term fix remains to be seen.

Still, despite ongoing headlines about the tough times, the economy has some bright spots — especially for the average citizen who’s wealth is mostly tied up in home ownership, he said.

Federal Reserve chairman Alan Greenspan has dropped interest rates to historic lows and, Sohn said, those rates will most likely drop more before climbing.

When those rates climb, the housing bubble will burst and create a whole new set of problematic economic issues. But for now, the average citizen has benefited from the chairman’s drastic measures, Sohn said.

“Some people say the monetary policy has become impotent — there’s so much liquidity, but nothing is happening,” he explained. “Some say we need to try a different tool.”

Yet, Sohn said that home ownership continues anchoring the economy.

In Boulder County, the picture is slightly better than the big picture, he continued, because people are still moving in more than they are moving out. And with them come dollars that will be spent on everything from local taxes to groceries to movie tickets.

Sohn also said that, despite the hit to high-tech, that sector has neared the bottom and should bounce back soon. He listed wireless networks, voice-over Internet protocols (which use the Web as a way to provide cheaper long distance telephone service) and voice recognition technologies as potential “killer” products to watch.

Meanwhile, he added, it could be 2004 before the stock market picks up.

“In the 1990s, you didn’t need to be that smart. The rising tide raised all the ships,” he said. “Now, you might need professional help.”

In Boulder County, Wells Fargo operates 10 bank branches with $800 million in assets and employs approximately 200 people.

For more information, visit www.DrSohn.com.

Pam Mellskog can be reached at 303-776-2244, Ext. 224, or by e-mail at pmellskog@times-call.com.