Economic Crystal
Ball For Detroit

D

avid Littmann, vice presi-
dent of Comerica Bank in
Detroit, predicts a slow
improvement in the
region's economy.
_ In his latest economic reports,
Littmann said real gross domestic
product (GDP) expansion in 2001
was 1.2 percent, compared with 4.1
percent in 2000. The slump that
occurred was centered in the high-
tech, capital spending, and Detroit-
related auto industry and manufactur-
ing segments of the U.S. economy.
After Sept. 11, the travel and aero-
space industries also suffered dispro-
portionate setbacks.
Extraordinary monetary and fiscal
policy stimulation -in 2001, together
with falling energy prices during the
summer, fall and winter, have stabi-
lized the U.S. economy and will
assure reinvigorated growth in 2002
and 2003.
Short-term interest rates were
pushed below inflation rates, a dise-
quilibrium that will be corrected by
rising short- and long-term interest
rates in the second half of 2002,
throughout 2003, and into early
2004.
U.S. economic fundamentals for
the 2002-2006 forecast period are rea-
sonably good, Littmann said, charac-
terized by strong capital investment in
2003 and a strong dollar, reflecting
superior productivity performance
and flexible financial markets.
Short-term economic threats to
accelerated recovery include increased
government spending and regulation
that crowd out private sector borrow-
ing, spending and investing, Japanese
fiscal and financial crises, and increas-
ingly predatory legal activism by tort
and trial lawyers against corporate
America.
Longer-term threats to our market
system and price stability remain the
same: the bankrupt (non-privatized or
liberalized) social security and health
care systems, failure to deregulate the
U.S. energy sector, and increasingly

vicious efforts by politicians to redis-
tribute income.

Predictions

The year 2002 benefits from the con-
fluence of record monetary and fiscal
stimulation from 2001. Government
spending returns to double-digit
growth because of the mid-term elec-
tions and the rebuilding of run-down
defense budgets.
Lower energy prices in the first half
of 2002 help underwrite recovery in
confidence and purchasing power.
Our "Recession Watch Index" ran at
its best level (zero percent) for five
consecutive months through January
2002, the most encouraging readings
on this forecasting monitor since
1983.
This string of zero-probability read-
ings on the RWI suggest at least 4-5
percent real GDP growth rates for the
second half of 2002. Such a result is
only somewhat muted by delayed
wealth effects, that is, delayed appreci-
ation in equity markets during the
early phase of expansion stemming
largely from events related to Enron
and other concerns about government
intervention in accounting -and pen-
sion matters.
Overall average (calendar year
2002) real GDP should still expand
2.6 percent over 2001, with consumer
price index (CPI) inflation chopped
to 1.4 percent, from 2.8 percent in
2001.
Fed funds rates will rise during the
second half of 2002, from 1.75 per-
cent in the first half, reaching 2.5 per-
cent at yearend. Long mortgage rates
should move from 6.8 to 7.2 percent
at yearend.
Light vehicle sales will drop 3.5 per-
cent, or 600,000 units, from 2001. This
is still a very profitable level (16.5 mil-
lion) of auto sales for companies using
state-of-the-art technology to cut costs.
It should qualify as the fourth best sales
year on record, but requires year-long
incentives to achieve.
Excerpted with permission of David
Littmann, Comerica Bank

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4/12
2002

17