U.S and Kansas Economic Forecasts for 1989 Midyear Update

Abstract

The National Economy On the whole, 1989 will tum out to be a year of curtailed growth for the national economy. Real GNP will grow only 2.2 percent for the year compared to 3.9 percent during 1988. Furthermore, much of 1989's growth will have taken place in the first quarter of the year, during which real GNP grew at an annual rate of 4.3 percent; more than half of this first quarter growth was due to the rebounding of the national farm economy from the effects of the 1988 drought. During the last three quarters of the year GNP will remain nearly Oat, growing at an average annual rate of only 0.4 percent. With the exception of government purchases of goods and services, which will increase slightly this year after no growth in 1988, all major components of GNP will grow more slowly this year than last.

The major force for economic growth will be will be exports, which will remain an area of strength in spite of a surprisingly strong dollar due Lo the healthy growth of our major trading partners. Business investment will grow only modestly this year, after being one of the major factors in 1988's economic growth. Weakening consumer confidence and continuing high interest rates will soften consumer spending, although it will still grow 2.2 percent this year. Consumer purchases of durables will be particularly weak due Lo 1989's high interest rates. Consumer purchases of nondurable goods will actually grow slightly faster in 1989 than they did last year, and growth of consumer spending on services will remain steady.

The sluggish performance of the economy during the latter part of 1989 will cause the Federal Reserve Board to reexamine its in0ation fighting strategy. As the economy approaches dangerously close to a no growth configuration, the Fed's emphasis will temporarily shift from fighting inflation to preventing a recession. Thus, interest rates will fall during the latter part of the year. However, underlying in0ationary pressures remain strong, and the Fed will be in a position of having very little room to maneuver when selecting from among policies which will prevent a recession and discourage in0ation. Thus, we do not expect interest rates to fall very far or for very long, unless the economy actually slips into a recession.