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National City VP says bottom's not about to fall out of economy

| Saturday, March 10, 2001

The economy will experience moderate growth throughout 2001 as the factors that caused a slow down have, or will, right themselves, according to Richard J. DeKaser, senior vice president and chief economist at National City Bank.

DeKaser made his predictions this week in a teleconference for the media.

Local businesses hope he's right. His predictions for a soft landing and a strengthening economy in the second half of the year was good news to local small business operators.

DeKaser said a principal cause for the economic slowdown was the slow, steady increase in the prime interest rate passed on by the federal reserve from mid-1999 through mid-2000.

The aim of Federal Reserve Chairman Alan Greenspan was to 'slow down the economy; to keep inflation from getting out of control Ð not a misplaced concern,' said DeKaser.

Inflation was at 1.5 percent in 1998, but had risen to 3.6 percent as of January 2001. The main reason for the spike in prices has been energy costs, said DeKaser.

After a mild first 10 months of the year, the weather turned suddenly harsher and unpredictable in November and December, especially in the northeast. Such changes came at a time when energy costs were rising.

'This drastic change from benign weather to poor weather explains a part of the consumer confidence,' said DeKaser. 'Poor weather keeps people home. They put off spending.'

Tim Pagano, owner of Pagano Shoe store in Charleroi, said he had a very good Christmas shopping season, but his business dropped off drastically when the weather suddenly changed for the worse.

'A lot of the elderly (consumers) don't come out when the weather is bad,' said Pagano.

Pagano said if the weather breaks for a day or two, people use that opportunity to work outside. They don't go shopping until the weather breaks for good.

Higher heating prices also required consumers to rethink their spending priorities, DeKaser said, noting home heating costs were up about 20 percent.

'As individuals have to spend more money to heat their homes, they have less money for discretionary spending,' said DeKaser.

DeKaser said energy prices have declined in recent weeks.

Sam Verner, owner of the Eastgate Exxon in Monessen, said the price of gas has dropped nearly 20 cents a gallon from October, when the price rose to about $1.55 a gallon. Prices stand at around $1.37 to $1.39 a gallon currently.

With a poor performance by the stock market at the end of 2000, consumer confidence was down. But those declines followed unprecedented levels of consumer confidence reached by the first half of 2000, DeKaser said. That meant many consumers chose to replenish their personal savings rather than spending their income so freely.

With higher energy costs, slightly lower consumer confidence and a sudden downturn in the weather, consumers were staying home more frequently in the past quarter of 2000. That trend mirrored 1986 and 1995, when the economy slowed down, but did not fall into a recession, DeKaser said.

That meant consumers were less likely to buy big-ticket items in the final three months of 2000.

Jim McCune, owner of Monongahela Ford, said he, like his fellow car dealers, felt a pinch in the final quarter of 2000.

'Things are picking up,' said McCune. 'The interest rate is pretty reasonable; it's creeping back down to where it is manageable. Inventories are better.'

McCune said March through May is usually a strong sales time for car dealerships. He said DeKaser's positive economic predictions come at an opportune time for him.

'It's been a long, hard winter and dealers are anxious to make deals,' said McCune. 'Deals are good and factory incentives are at an all-time high.'

Regardless of the reasons for a slowdown in consumer spending, the net result was greater inventories and less demand for manufacturing of new products.

But DeKaser said retail sales have rebounded in January and February.

The economy has begun to right those things that slowed down what was unprecedented growth, DeKaser said. The Federal Reserve has begun to cut the prime interest rate. The major banks have indicated in their reporting to the Fed that they perceive the economy as improving. That will have a positive affect on consumer credit conditions.

'We're likely in the most intense period of economic softness,' said DeKaser. 'There is not a recession in the forecast. We will return to moderate pace of growth and not boomtown.'

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