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Diane Swonk: Consumer confidence

Diane Swonk is the director of economics/chief economist and a senior vice president of Bank One Corporation in Chicago. She designed the bank's regional model and currently manages their Corporate Economics Group. Considered an expert in economics, Ms. Swonk has consulted with policy makers from the Chicago mayor's office to the United States White House.

CNN: Yesterday the consumer confidence report showed the lowest numbers in eight years. Is this proof that the U.S. economy is in a recession?

SWONK: I think the proof that the U.S. economy is in a recession was in today's GDP (gross domestic product) number, the first negative number in quite a while. The important thing is that it looks like we were not in a recession prior to September 11, according to today's data, but we are in one now. I think it's important to note that two-thirds of the third quarter was booked prior to September 11, and then the world came to an almost standstill. We have had some resumption of activity since then, but not enough to keep us from a much more negative fourth quarter. Unfortunately, the worst is yet to come.

The good news is, there is a light at the end of the tunnel, and it is brighter than anyone could have imagined prior to September 11, and that is due to increased monetary and fiscal stimulus. Finally, I'd note that other economies have transitioned and learned to expand in the face of terrorism, most notably the UK and Israel, and there's no reason to believe the most flexible and adaptable economy on earth can't do the same.

CHAT PARTICIPANT: What do you think the Bush administration needs to do in order to promote people to "oil the wheels of the economy?"

SWONK: I think the key issue they've been focusing on already is to get out of partisan politics and get into non-partisan looks at fiscal stimulus. Congress has temporarily stalled on the fiscal stimulus package because of political ideologies. The Bush administration needs to continue to remain a neutral arbitrator in the process and get people to focus on the issue at hand -- the economy, not politics.

CHAT PARTICIPANT: Do you think if consumers buy only American made products it would help the American economy?

SWONK: Although patriotism is always warranted, and mine is certainly higher than ever, the issue is that we're in the world together, and the unity that's come from this has been the silver lining to the cloud of uncertainty that haunts us. In a global economy, you need to think both domestically and globally, and that means finding the best deal for Americans. We've learned that protectionism and isolationism always hurts us in the long run. I think it's become painfully obvious that those who are the most disenfranchised economically from the riches of the west are those who have become our most dangerous foes. This is a time to embrace rather than disassociate.

CHAT PARTICIPANT: How will this recession differ from previous ones? I am asking this question because at the current situation. A way out is not in sight and the political situation seems to get more and more tricky.

SWONK: It already has no characteristics of other recessions. It is unique because the events that took us through the ice were unprecedented. We've never seen a recession record home and vehicle sales, and that's what we're seeing today. There's clearly a way out. We've drained inventories to such an extreme that the cupboard is bare in many industries, and that's music to an economist's ears, because it means that regardless of what happens in Washington, the cupboard needs to be replenished.

It's also highly different from any other recession in that we already had a pipeline of the most aggressive fed stimulus in history working for us, and fiscal stimulus. And it's important to remember that the lags in monetary policy are 12-18 months, and the first easing occurred January 3, 2001. So the bulk of the effects of that stimulus are still ahead of us. Finally, we have energy prices falling, rather than rising, which is helping to mute and mitigate the pain of the loss of income many are experiencing, and this is something we didn't even have a year ago.

CHAT PARTICIPANT: Can we learn any lessons from other countries as to the length of time it takes an economy to "normalize" in response to terrorism?

SWONK: We know the lesson from other countries is that we can normalize. In terms of the length of time, emotionally, it's unclear, and economically, it's not out of the range of possibilities to see a much stronger economy by the spring of 2002.

CHAT PARTICIPANT: Is the Bush policy to stimulate the economy simply via tax cuts and defense spending? If so, isn't that a rather '70s way of doing things?

SWONK: I won't comment on the Bush policy, per se, because they've been trying to stay out of the fray on this. I think the best policy today is not necessarily on the table. We need a balance between business and consumers. Government shouldn't be choosing winners and losers. Most economists agree that the best policy today in terms of stimulating the economy is to accelerate depreciation for capital investment, and lower the payroll tax. It helps businesses and consumers alike, and helps consumers in particular who are most likely to spend the money. It doesn't have the logistical problems of rebates. It could be done with a clause in it to be temporary. It should be quick, immediate, short term, and to the point. We'll deal with long-term problems later.

CHAT PARTICIPANT: Would it help if I started shopping with a vengeance?

SWONK: As long as you won't default on your debt, it would help to shop with a vengeance! No one should be irresponsible, of course. But despite the fact this has pushed us into recession, we'll peak with an unemployment rate of about 6.25 percent, a rate that's one of the lowest we've seen, but also one that just eight years ago, the Federal Reserve thought was intolerably low. It's important to remember that despite the fact we're entering a recession, it's mild by historical standards. Almost 94 percent of our labor force is still working.

CNN: Do you have any closing comments for us today?

SWONK: It's important to remember that we live in the most flexible and adaptable economy in the world. Other economies have learned to deal with terrorism and expand, and there's no reason to think the U.S. can't do that. Those who think we can't will be badly burned. The other thing to remember about this is that it's created an international sense of opportunity and cooperation that could create a positive thing to move ahead on, and we can't overlook the opportunities for trade, and the opportunity to bring the disenfranchised into the fold, to move ahead.

CNN: Thank you for joining us today, Diane Swonk.

SWONK: My pleasure.

Diane Swonk joined the chat room via telephone from California and provided a typist. The above is an edited transcript of the interview on Wednesday, October 31, 2001 at 12 p.m. EST.


• U.S. economy shrinks
October 31, 2001

• Diane Swonk Bio

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