http://news.excite.com/news/r/991025/18/tech-fed-yk

Stockpiling Ahead Of Y2K Seen Boosting U.S. GDP

Updated 6:38 PM ET October 25, 1999

By Ellen Freilich NEW YORK (Reuters) - U.S. businesses and individuals will probably spend more money than usual stockpiling goods at year-end due to concerns about potential year 2000 computer problems, experts told a special Senate committee in New York Monday.

Such stockpiling would be one way to guard against any disruptions in the supply chain early in the new year if computers have problems identifying the new year. Some older software might read the year 2000 as the year 1900 because it was written to recognize only the last two digits of a year.

But the effect of that buildup on the overall economy "looks to be secondary" at most, Federal Reserve Bank of New York senior vice president Charles Steindel said.

"As best as we can tell, there may be some modest pick-up in inventory investment toward the end of the year," Steindel said in testimony before the U.S. Senate's special committee on the year 2000 technology problem.

Steindel said the magnitude of potential inventory buildup is "open to question." But he said that if fears of the century date change prompt firms to boost their inventory stocks by as little as one-half of one percent in the fourth quarter of 1999, the annual rate of GDP growth will be increased by about one percentage point.

Nonetheless, said Steindel, as long as the Fed has an idea of the magnitude of the precautionary inventory stocks that are accumulating, the buildup will not greatly affect the Fed's thinking about the general course of the economy.

But Goldman, Sachs & Co. chief U.S. economist William Dudley, told the senate panel that even a modest buildup of precautionary inventories would push growth in the fourth quarter of 1999 about one percentage point above the underlying trend and then depress growth in the first quarter as the precautionary inventories are depleted.

"Defensive stockpiling of even modest dimensions can have a huge impact on growth patterns around the turn of the year," said Dudley.

But he said any economic weakness generated by Y2K is likely to prove temporary. Monthly indicators of economic activity might drop sharply in January and then rise sharply in February as production comes back on line, he said. But by the time the books close on first-quarter GDP at the end of March, firms will have had time to make up for lost output, he said.

Dudley also predicted that any decision by Federal Reserve officials to raise their target federal funds rate before year-end will not exacerbate liquidity problems.

"The Fed will provide sufficient liquidity to keep the federal funds rate close to its target, be it the 5.25 percent current target, or the 5.50 percent target that may be set at the Nov. 16 Federal Open Market Committee meeting," he said.

Dudley said Y2K may be playing a role in the stock market's recent weakness. Mutual funds may be selling stocks to raise cash in order to build up liquidity, he said.

The temporary impact of Y2K on hardware purchases has helped hurt the stock performance of some well-known technology companies, Dudley added.

-- Uncle Bob (UNCLB0B@Y2KOK.ORG), October 26, 1999