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Page4A - TTTO CHARLOTTE POST - Thuisday, Januaiy 5. 1988 An Economic Overview And Outlook by John G. Medlln, Jr. Chief Executive Officer First Wachovia Corporation As 1989 begins, the economy Is being Influenced by a variety of positive and negative forces. In addition to the usual slowing factors typically present In the mature stage of a short-term business cycle, It Is In the midst of a longer period of fundamen tal adjustment and change. The adjustment to a more competitive and Interdependent worldwide economy has been a disruptive and negative force In the U.S. during this decade. The Import of cheaper goods from lower-cost countries has caused the restructuring of major In dustries and the export of many jobs. This has dampened pro duction and employment but Improved efficiency and com petitiveness. The origin of our economic problems can be traced to shortsighted public policies and actions of past decades. The most prominent were excesses In the growth of government spending and money supply. They created the spiral of Infla tion which peaked In 1980. Since then, there has been a period of disinflation which brought serious economic Im balances and financial distor tions along with unusual volatil ity and speculation. Some of the more notorious offspring of the inflation/ disinflation cycle are the dra matic stock market crash of 1987; the wave of corporate takeovers and leveraged buy outs; and the extraordinary number of troubled or failed thrifts and banks. The Impend ing ball-out of the FSLIC Is a major xmresolved problem and a huge, unpaid bill. The developments of the 1980s are disturbingly similar to those during the decade of the twenties. It should be recalled that there was an Inflation peak In 1920 followed by a peri^ of disinflation which did not reach bottom until 1933. Unfortunate ly, the main preoccupation to day Is with short-term cause and effect. A review of more im mediate factors which will In fluence economic life In the near future may be of greater Interest. The present economic expan sion Is six years old and is the longest on record In peacetime. Its unusual strength and length are due In significant measure to the stimulative effects of over $1 trillion In federal deficits since 1982. The budget deficit reached a peak of $220 billion, or 6 percent of GNP, In 1986. In addition, explosive growth In consumer, business, and gov ernment debt helped drive and extend the expansion. Growth In the Initial three to four years of the expansion was boosted by consumer demand and spending which was de ferred from the preceding period of high Inflation, stratospheric Interest rates, and deep reces sion. For the past couple of years, a cheaper dollar and a re covery of exports and capital ex penditures provided extra stim ulation as the consumer sector moderated. The record expansion also brought some bad side effects. Much of the increased domestic demand was satisfied by higher Imports because of a strong dol lar until 1986 and American In dustry's lack of competitiveness. The result was a rising trade deficit which reached a record $170 billion In 1986 and a rapid build-up of net external debt to a current level of about $500 bil lion. In 1985, the U.S. became a net debtor nation for the first time since 1914. Over the past six years, real GNP for the U.S. grew at an above-baseline average annual rate of about 3.8 percent. This also was the approximate rate of growth In 1988, and It is not sustainable Indefinitely. In ef fect, there was considerable borrowing from future growth potential. The Increased feder al, consumer, and foreign debt must be serviced, and it will serve to restrain the future stan dard of living for Americans. Self-discipline In eliminating our budget and trade deficits will be much less painful than an Involuntary solution Imposed by a dispassionate and unmer ciful international marketplace. Some progress has been made, but not enough. The budget defi cit has declined to $155 billion, or just under 4 percent of GNP. The trade deficit has moderated to an annual rate of about $130 billion. However, these levels still are dangerously high and must be brought steadily toward balance If serious problems are to be avoided. The stock, debt, and currency markets are Increasingly skep tical of rhetorical promises to reduce the twin deficits and are likely to behave In an erratic and negative fashion until credi ble action is taken by the new administration and Congress. Unstable financial markets can be expected for the next several months, while the politicians pasture and maneuver, with per iodic pressure down on the dol lar and up on Interest rates, un less the economy weakens. As Is typical In the advanced stage of expansion cycles, pro longed growth is beginning to cause capacity strains, labor shortages, and inflationary pressures. Several years of above-baseline performance have taken up most of the slack In the economy. The potential for further real GNP growth Is limited to the basic and natural forces which normally drive growth. The baseline real growth po tential of an economy Is the sum of the rates of labor force In crease and productivity Im provement. The total of these rates will be In the area of 2 per cent to 2.5 percent for the U.S. In the next several years. That Is about the best baseline real growth rate which can be ex pected for our economy on aver age for some time. Several years of above baseline growth, such as has been experienced by the U.S., usually are followed by a period of below-basellne growth to pay back some of the borrowing from the future. That Is a likely prospect for our economy In the years ahead. From this point forward, growth above baseline potential simply will fuel Infla tion and precipitate a recession. A recession may be avoidable If the budget deficit Is reduced steadily and monetary policy Is pursued on a delicate middle ground course between exces sive tightness and ease. Also, central banks of Industrialized nations would have to help sta bilize the dollar and permit a gradual elimination of our trade deficit without driving Inflation and interest rates upward. If this extraordinary coopera tion can be achieved In an envi ronment of conflicting political and nationalistic Interests, the U.S. economy might be able to continue growing for several more years without overheating or recession. The poor record of our political leaders In restrain ing government spending In the past raises doubts about their doing It now. If not, a more serious crisis en vironment probably will be re quired to force U.S. politicians to take the unpopular actions ne cessary to control spending. That, unhappily, is the nature and fate of democracies where political leaders lack the will or skill to transform divergent spe cial Interests Into a national consensus which serves the overall public Interest. Despite these contingencies and some signs that the econo my may be slowing, the expan sion probably will continue In 1989. The odds seem to favor real GNP growth of around 2 percent to 2.5 percent this year. There Is the possibility of a re cession beginning In the latter months or early 1990. especlalty If the rate of advance continues to exceed baseline potential. Price Inflation Is likely to aver age In the area of 4.5 percent to 5 percent. Interest rates will move on an erratic course and could rise a percentage point or so from present levels. The pres sure Is likely to be more In shorter maturities than In the longer-term range unless Infla tion expectations worsen. This year is likely to bring a slightly lower rate of growth in retail sales and the purchase of a few less cars and homes. The unemployment rate should not change very much. A reasona bly good Christmas shopping season provides encouragement for the near term. The slowing In the consumer sector should be offset by sus tained strength In exports which are expected to grow around 10 percent compared with 27 per cent last year. Also, capital spending should continue to be a positive force as capacity utili zation rates rise. However, the ability of these sectors to pro vide above-baseline growth will diminish as 1989 progresses. For the years ahead. It may be advisable to get prepared for a slower growing economy at home and abroad than has been enjoyed during the seventies and eighties. There are no strong engines of growth any more, and It Is unlikely the record expansion of this decade can be sustained much longer. Prepare Forms Carefully In rounding up the data re quired for Form 1040, will you be filled with pride once again at the careful organization of your financial records, or cha grined at your Inability to put your hands quickly on many of the documents you need? If you're In the second catego ry, tax preparation is the logical time to do something about put ting your papers In order. This year, after tracking down the re ceipts, canceled checks and all the rest. Instead of throwing them back Into a shoe box or drawer, it's almost as easy to slip them Into manila folders marked "Insurance," "Mortgages," "Securities," etc. What's to be gained by such neatness? Plenty, Including: - Making sure penalities do not result from overlooking ob ligations, or losses Incurred be cause of a failure to collect amounts owed you. - Avoid the loss of documents that almost Inevitably result when valuable papers get mixed up with routine bills and other mall. - Keeping up with ever growing list of records that the government requires us to Tax Pointers And Reminders For Filers Special To The Post Mike Mattlck of Mel Jackson offers the following tax Informa tion to help In preparation for this year's filing. Minor Children Minor's Income. Under the '86 TRA, the unearned Income over $1,000 of a child under the age of 14, Is taxed to the child at the highest marginal rate of the child's parents. The tax Is deter mined by computing the addi tional tax that the parents would pay If their Income In cluded the child's earned In come over $1,000. In making this calculation, the amount of the parents' deductions and credits are not affected by this "as If inclusion of any of the child's unearned Income in the parents' income. Note: Children five years of age or older In 1988 need a social secutliy number or there will be a $50 penalty per child. In 1989 children three years or older need a social security number. Tax reminder: You can't claim a dependency exemption for a parent If his or her gross In come exceeds the exemption amount ($ 950 for 1988). Principal Residence Exclusion For Certain Incapacitated Taxpayers To qualify for the over-55 ex clusion on the sale of a princi pal residence, the taxpayer must have lived in the residence for at least three out of the five years before the sale. The Act liberalizes the use requirements for taxpayers, periods which Mattlck they own the residence and re side in a qualified facility (such as a nursing home) count as time lived In the residence. However, they must actually live In the residence for periods ag gregating one year during the five-year period. A qualified fa cility Is one licensed by a state or political subdivision to care for Individuals who have be come Incapacitated. U.S. Savings Bonds: New Interest Exclusion for Education Starting In 1990, some taxpay ers will be able to redeem U.S. savings bonds tax-free If they spend an amount equal to the bond proceeds on higher educa tion for themselves, a spouse, or a dependent. The Interest exclu sion isn't, however, available to married taxpayers filing separ ately. And It's phased out for higher Income taxpayers. No Gift Bonds: Bonds pur chased by a parent and put In a child's name won't qualify, not will bonds purchased by a grandparent or other relative — even If the bonds are put In the parent's name. So, If Grandma and Grandpa want to use sav ings bonds to help finemce Jun ior's education, their best bet Is to give the parents the cash and let them buy the bonds. Life insurance: On investment- type life insurace a 10 percent penalty can exist on certain policies. Before withdrawing money from Insurance, check with tax advisor. Deductions: A tax deduction for personal Interest still exist on Master charge. Visa and per sonal loans. For more tax Information, Mel Jackson's Is located at 201 S. King's Drive. Call 377-5209 for an appointment. maintain. Simplifying the fact gathering chore at future filing times. Also, organizing one's records contributes to improved finan cial planning by making It pos sible to summarize the results periodically. And. of course. It pulls Into one place the papers your family would need In your absence. Such documents, such as con tracts or negotiable securities, should be kept In a safe deposit box, letting a summery or pho tocopy replace them In the home file. The major headings for a per sonal finance filing system might Include: Bank Records — Savings ac count passbooks, receipts for deposits, cancelled checks and bank statements, along with the checkbook or ledger In which you post transactions as they occur, showing perhaps, their tax consequences. Stocks. Bonds and Other Securities — Dates purchased and prices paid, dividend dates and accounts, commissions and other expenses Incurred. Non-security Investment — Copies of notes held, contracts, papers on real estate holdings. Home Ownership Records - - Deeds, mortgages, records of capital Improvements. A similar file should be kept for a second home. Records of Major Assets — Costs of acquiring and holding jewelry, autos, boats, collectible Items. Pension Record -- Employ er's retirement arrangements, papers from Keogh plans, IRAs, 401(k)s, Social Security, military or government pension entitle ments. See KEEP On Page 5A Cautious Investing By Richard Smith News USA Bernard Baruch made $3 mil lion on Wall Street back when a million was real money. He kept it, too. He began selling his stocks two months before the Crash of 1929. His advice on investing was simple and to the point. Before buying stocks or bonds, he said, remember the law of supply and demand. As prices rise, more people decide to sell their stocks. This forces prices to fall. As prices fall, sellers become less willing to sell and prices begin to rise. Don't try to buy at the bot tom and sell at the top. It can't be done. When the market is right, get the facts on a company before they are generally known and act on them quickly. Don't act on tips or predic tions or inside information — rely only on the facts. Before you buy a stock, Baruch said, find out every thing you can about the com pany, its management and competitors, its earnings and its prospects for growth. To have an extra advantage, stick to investing in the things you know best. Watch Your Money Bernard Baruch gained wealth by keeping an eye on his in vestments. The secret, he said, was to invest in just a few companies so they could be watched more closely. He told investors to make a habit of regularly checking on each investment to see if any thing had happened that might affect its future value. To learn from m'rslakes, Baruch suggested that 'inves tors sell all of their stocks from time to time so that they might consider their losses and gains. By finding out what had worked and what had failed, they would be prepared to make better decisions in the future. Common Mistakes According to Bernard Ba ruch, investors often buy stocks with too little information and risk too much in an attempt to get rich quickly. Don’t speculate, Baruch warned, unless you can make it a full-time job. As part of this cautious ap proach, Baruch believed, in vestors should always keep plenty of cash. They should also sell stocks that are declining in value as quickly as possible. The best investor knows that no one can be right all the time. The very human desire to act as others are acting must be resisted by investors. Don’t get caught up in the crowd, Baruch cautioned, think for yourself. Crowds are too optimistic during booms, and far too pessimistic during busts. Caution protected Baruch from the Crash, and informa tion gave him the chance to profit during the boom periods. Business Briefs News USA Are you earning 166 percent per year? That’s the rate of return reportedly earned by the late Charles W. Lubin from the Kitchens of Sara Lee. He invested $21,000 in his new business in 1951 and sold the company to Consolidated Foods for $2.8 million five years later. Lubin, then in his late forties, worked in a space no larger than a typical modem house baking 790 cheesecakes—$4(X),(XX) worth in his first year. Bleak for Blacks? Black MBAs describe the companies they work for as unsupportive, indifferent, and reluctant to accept blacks. In a survey reported in//flrvarJflujinejs/?ev/ew, only one in six found the environment for blacks to be encouraging or positive—nearly half said the company’s policy reflected token ism, a lack of direction, or was supportive in words only. Buying a new car? A telephone call to a car dealer’s fleet sales manager can usually save you from several hundred dollars to several thousand dollars off the price offered to walk-in customers. If you know which car you want and how you want it equipped— but are willing to choose from what is in stock—^you’ll get the best price with no bargaining iequiied.D
The Charlotte Post (Charlotte, N.C.)
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Jan. 5, 1988, edition 1
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