Some of This May Even Be Correct . . .

What will the new year bring? Here’s a baker’s dozen predictions for 1999. At least some should turn out to be right.

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1. U.S. Economy Will Be Strong. The U.S. economy will defy widespread predictions of slowdown, even recession, and grow 2% to 3% in output of goods and services, just about its long-term average. That means more than 3 million jobs will be created. Clues to the economy’s strength lie in growing sales of semiconductors, the electronic circuits at the heart of most products and services today. Semiconductors are going into a new multiyear expansion cycle, thanks to the spread of the Internet and of sales worldwide of wireless telephones, personal computers and hosts of other products. In addition, home construction will stay strong for 1999. More than 1.5 million homes will be built--as good as any year since 1987.

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2. Rival Will Sink Dollar. The new European currency, the euro, will attract investments in European government bonds from companies and central banks around the world. The companies and banks will switch some reserves out of U.S. dollar securities, and this will reduce the dollar’s value against European currencies. That will discourage the U.S. Federal Reserve from lowering short-term interest rates and will probably send stock prices downward in 1999’s first quarter. But the dollar--and stock prices--will recover by mid-1999, as European economies and the euro have teething problems and the dollar’s attractiveness as a safe haven sways global markets.

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3. Big Mergers Continue; Improvement a Question. Mergers will be as big and international as they were in 1998--Daimler-Chrysler; Deutsche Bank-Bankers Trust; Exxon-Mobil. Banks and oil companies, from Chase Manhattan to Chevron to Texaco, will try to find partners. Ford, under aggressive new President Jacques Nasser, will lead the global industry and acquire or form a partnership with a European company--Volvo or BMW is rumored. Japanese car makers will get into the act--Honda could use a partner; Toyota may want one. Nissan needs a buyer but may not find one because it is burdened with mountainous debt. General Motors will shrink, spinning off its Delphi parts division, and perhaps others, as it struggles to become supple again. It could be choosing the wiser course.

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4. Trade Fights Whether Clinton or Gore Is President. Whether Clinton continues as a censured president or is forced to resign and Gore takes office--a situation too close to call--Congress will be in uproar over trade. The U.S. deficit on goods, services and financial transactions--the current account--will rise toward $300 billion. Europe, China, Mexico and Japan will all be threatened with protectionist legislation. Compromises, among nations and lawmakers, will avert international disaster. No tax reform legislation will pass. Action on Social Security reform will be left until after the 2000 election.

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5. Japan Will Go Nowhere. Japan, the world’s biggest question mark, will remain in recession--and suspended animation--for the new year. Distressed banks will be taken over by government, but needed changes won’t be made. Government stimulus packages, even at $100 billion to $200 billion for dam and road building and coupons to encourage consumers to spend, will have relatively little effect. Japan is in a funk as employees are laid off or forced into early retirement on an unprecedented scale. There could be political upheaval in ’99 if unemployment, now at 4.3%, rises too fast. More likely, 1999 will be a year of muddling through until a national election in 2000 helps sort out national priorities.

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6. Asia Will Improve. Asia’s economies, apart from Japan’s, will look better in ’99. South Korea will prove a success story of economic reform. President Kim Dae Jung’s government has invited Los Angeles’ Wilshire Associates to manage a $1-billion restructuring fund, financed by South Korean banks and aimed at getting capital to South Korea’s small to mid-size companies. They and not the giant conglomerates known as chaebol will be the new engines of South Korea’s economy. Moody’s will upgrade South Korea’s bond rating next year. Elsewhere, China will continue economic reforms and also raise government spending to prevent mass unemployment. The result will be roughly 7% economic growth. Taiwan, Hong Kong, Thailand and Singapore will all have better years--a welcome prospect for California’s economy.

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7. Oil Prices Will Recover. Contrary to most expectations, the price of oil will rise in ’99 to levels of $16 to $18 a barrel. One reason will be cuts in supply as oil companies shut down production of higher-cost wells in the U.S. and Canada. Also, recovering Asian economies will use more oil next year than they did in 1998. The OPEC countries will pump a higher percentage of the world’s oil and gain influence as episodes of cheap oil, like the current one, discourage exploration for non-OPEC supplies.

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8. Mexico Will Grow as U.S. Partner. Trade and commerce between the U.S. and Mexico will set records again--reaching more than $250 billion in goods and services. U.S. exports of manufacturing equipment will increase, as will U.S. imports of Mexican finished goods. The higher oil prices will help Mexico’s economy, and the country will be spared most trade tensions because of its growing relationships with such key states as California and Texas. Elsewhere in Latin America, the economies of Brazil, Argentina, Chile and other countries will recover decisively from this year’s problems.

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9. Internet Usage, Competition Will Spread. Telephone, cable and high-tech equipment suppliers will offer businesses and consumers faster access to the Internet. The result will be more business done in cyberspace. One effect will be anti-inflationary: Business on the Internet cuts out stores and distribution agents, with buyers being able to save up to one-third on items purchased. Consumers don’t always see such savings, but Internet companies do see a promise of profits. That’s why competitors will grow in number for Amazon.com and other Internet companies.

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10. Microsoft Unharmed, DreamWorks Uncertain. Microsoft will emerge relatively unharmed from the government’s antitrust trial. Its business will face other challenges in 1999, from changing competitors and technology, not government. General Electric’s GE Capital will become a major lender to Japan’s small to mid-size companies, stepping into a void left by Japan’s near-bankrupt banks. In entertainment, DreamWorks SKG will face a decision on whether to continue ambitious plans to be a full-fledged studio after the disappointing showing of its film “Prince of Egypt.” Seagram will struggle to prove that diversifying out of liquor and chemicals and into movies and music was a smart move. But 1999 won’t render a final decision. News Corp., owner of the Dodgers, and Walt Disney, owner of the Angels, will demonstrate spectacular sports marketing in ‘99, but neither company’s team will win the pennant.

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11. California Will Prosper. Incoming Gov. Gray Davis will get a break as California’s economy is helped by recovery in the semiconductor industry and in the economies of Asia and Latin America. The state budget will probably show a slight surplus rather than the deficit now predicted. That would allow Davis flexibility to meet demands of state workers for pay raises and backers

of his recent campaign for spending programs. It’s no prediction at all to say Davis’ response will be caution.

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12. Southern California Will Build. Job growth in the region will be led by construction, whether on the Alameda Corridor project in Los Angeles County; homes and factories in San Bernardino and Riverside counties; or offices and homes in Orange, Ventura and San Diego counties. Unions led by Latino labor leaders will provide key support for reform of the Los Angeles City Charter in the April election.

The labor leaders will emerge as a new economic force in a city in which old-fashioned business leadership has faded. Campaigns to spread acceptance of higher minimum wages--living-wage laws--will gain strength as a result.

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13. Y2K Overblown; Stocks to Rise. Predictions of terrible computer troubles because of the shift to the 2000s will prove to be overblown. Most predictions are.

Like this one: The stock market will end 1999 nearing 11,000 on the Dow Jones industrial average, a 19% rise from last week’s levels.

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James Flanigan can be reached by e-mail at [email protected].