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Posted on 07/11/2003 10:13:29 AM PDT by Dave S
Americans Wonder When Sun Will Rise on Economic Recovery
Like TV meteorologists blissfully announcing sunny skies while it's raining, economic forecasters are declaring that the moment of rebound is at hand. That has a lot of umbrella-carrying workers and executives wondering, "So where is the economic sunshine?" It's a good question.
For the past two quarters, the U.S. economy grew at an annual rate no better than 1.75%, so slowly that the unemployment rate kept rising. But forecasters say the pace of growth is quickening now. They predict the U.S. will grow at a 3.5% or 4% annualized pace in the second half, or even better, enough to bring down unemployment. If only the economy would cooperate.
The forecasters story has some logic. The Federal Reserve has cut interest rates, making borrowing cheaper. The latest tax cuts are swelling paychecks this summer, adding oomph to consumer spending. The dollar is weakening, aiding exports. The stock market is rising, a big plus to spirits and spending.
"We've applied every macroeconomic policy tool in the kit to get this economy to do better," says Richard Rippe of Prudential Securities Inc., who foresees growth of 4.4% in the second half. Economists believe this stimulus will show results soon.
Consumer spending is holding up well, despite a disappointing job market. Auto makers' production plans for coming months are promising. And the housing market just won't quit.
So surely, the argument goes, businesses are about to increase production to build inventories in anticipation of rising sales and to increase spending on computers, equipment and new buildings. Modest increases in sales and orders will boost corporate profits and cash flow significantly. Perhaps companies won't add workers readily, but they'll start spending again. Combine that with steady increases in consumer spending and continued strength in housing, and, voila, a happy ending (and a huge sigh of relief from President Bush's re-election campaign strategists).
But as the second half commences, the economy doesn't yet feel like it's taking off. "The data hasn't provided any confirmation of the forecast," says former Fed board member Laurence Meyer. "We're not getting quite the start that I'd anticipated."
Business-confidence surveys show an encouraging improvement, and recent corporate takeover moves suggest a possible end to boardroom paralysis. But business spending is showing only the slightest signs of an upturn, and employers still are cutting payrolls. "Businessmen are unwilling to get out in front," says Mr. Meyer, who works with Macroeconomic Advisers LLC of St. Louis, which sees 4.5% second-half growth. "There is this lingering doubt that they know something we don't know."
Economists argue business has run out of excuses. "We felt like we were in this situation a year ago, and then came the accounting scandals and the stock-market sell off. We felt like we were in this situation six months ago, and then came the war with Iraq," says Robert Melman of J.P. Morgan Chase & Co., which expects 3.75% growth in the second half.
But executives don't need to justify their caution to economists. Nothing about this business cycle has obeyed forecasters' computer models so far. If business decides not to come to the party, there won't be a party. "Businesses want to see stronger demand for their products, and they don't see it," says Bank of America's Mickey Levy, whose relatively pessimistic forecast is for 2.9% growth for the rest of the year. "What's going to lead businesses to want to build inventories in the current environment?"
Then there are American consumers, stalwarts of the global economy. The optimistic consensus expects consumer spending to grow a bit faster in the second half than in the first.
But why is that likely? Auto makers find consumers less responsive to zero-rate loans. The cash-generating mortgage-refinancing boom may be ending. And employers aren't adding many new workers yet, and are squeezing health-care and pension benefits for existing workers.
"Any newfound optimism will quickly fade unless the job market soon rights itself," admits Mark Zandi of Economy.com, a West Chester, Pa., forecaster that sees 3.5% second-half growth. "It's unlikely that consumers will ... continue to shrug off the mounting job losses and rising unemployment for much longer." That concern is precisely what has many businesses holding back.
The federal government has done all it's going to do to help the economy, its efforts partly offset by tax increases and spending cuts by states and localities. The drooping dollar will give exports some help, but sorry economies outside the U.S. aren't very good customers.
Forecasters figure that if consumers keep borrowing and buying a bit longer, business spending -- and eventually hiring -- will kick in and the U.S. will enjoy a self-reinforcing cycle of growth.
It's a nice story. It might even come true. But risk of an unpleasant cycle -- in which the economy stalls as businesses and workers eye each other anxiously and put off spending for a while -- is too big to ignore.
Write to him at capital@wsj.com.
ABOUT DAVID WESSEL
David Wessel, 49, The Wall Street Journal's deputy Washington bureau chief, writes Capital, a weekly look at the economy and the forces shaping living standards around the world. He also appears frequently on CNBC.
David has been with The Wall Street Journal since 1984, first in the Boston bureau and then the Washington bureau, where he was chief economics correspondent. During 1999 and 2000, he was the newspaper's Berlin bureau chief. He also has worked for the Boston Globe, where he shared a Pulitzer Prize for a series of stories on the persistence of racism in Boston, and at the Hartford (Conn.) Courant and Middletown (Conn.) Press.
He is the co-author, with fellow Wall Street Journal reporter Bob Davis, of "Prosperity: The Coming 20-Year Boom and What It Means to You" (Random House/Times Books, 1998), which argued that the next 20 years will be better for the American middle class than the previous 20 years.
Not necessarily. A contrarian would expect it'll be a first half recovery instead, probably 2005..
| A Recall AND a Fundraiser? I'm toast. |
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What a surprise. The same ball-less and clueless morons who reward themselves with 8 figure compensation and perks, and then outsource everything under the sun to India and China.
"President Bush better so something to get this economy back on track," said Mary S. A. Dumbass, as she struggled to load a 98-inch screen television in the back of her $45,000 SUV. Ms. Dumbass was particularly irate because the overflowing parking lot at the shopping mall forced her to park three miles away, and she had to settle for the floor model of the television because the electronics store was sold out.
/sarcasm off/
So what is your solution?
Creating an "Island America" is not going to work. How many people do you know that are going to be willing to pay twice as much for a pair of jeans of lesser quality to buy American. The American automobile industry almost died twenty years ago, not because of price but because its quality sucked. Now its doddering along because companies like General Motors are paying two or three thousand dollars per car just to pay the health care costs of its RETIREES.
As for increasing tarriffs across the board and interjecting more protectionism, that was the cause of the great depression in the 30's. Raising tariffs or otherwise putting up barriers today as the Europeans and Japaneese are collapsing under the weight of their safety net would result in trade war and fewer goods being sold throughout the world.
Furthermore, you dont decide to produce products in the US and instantly have the capability to do so. If we decided today, it would likely take three or four years to do so and if you think corporations are hesitant to make investments now, just think how hesitant they would be to move production back to the US where the likelihood of ever showing a profit is likely very small. You really cant expect to sell a product here for $500 that sells throughout the rest of the world for $200 or do you?
2017, with the rise of nanotechnology and breakthroughs in bioengineering and fusion power.
That is, if a recognizable America survives the imminent implosion of the Debt Bubble.
And before anyone points out that Toyota is a Japanese auto manufacturer, realize that many of their cars are built right here in the U.S.
Oh, and they just announced a few months ago that they are building a new $1.8 billion plant in Texas to manufacture light trucks, too.
If you ever need evidence of the strength of the U.S. economy, consider this: over the last few years, BMW, Daimler-Benz, and now Toyota have all been building llight truck plants in the U.S., at the same time most of the countries in the world are moping around with high unemployment rates, driving 600-pound cars made of tin, in a desperate attempt to reach some idiotic Kyoto air quality standards.
Yup.....
Then logic would indicate they're causing the problem, not curing it.
"Insanity is doing the same thing over and over and expecting different results." -- Albert Einstein
And I may be wrong about this, but I believe the tariff on pickup trucks only applies to heavier models that would compete with the Dodge Ram, Ford F-series trucks, etc.
These companies build their vehicles (including many car models, which aren't subject to any tariff) here for one simple reason -- this is where they sell most of them.
The assertion that the Smoot-Hawley tariff was responsible for the Great Depression is a myth based on ignorance of historical facts. The stock market crashed in October, 1929, but Hoover did not sign the tariff into law until June 17, 1930, and therefore could not have caused it.
Imports formed only 6 percent of the GNP. With average tariffs ranging from 40 to 60 percent, this represents an effective tax of merely 2.4 to 3.6 percent. Yet the Great Depression resulted in a 31 percent drop in GNP and 25 percent unemployment. The idea that such a small tax could cause so much economic devastation is too far-fetched to be believed.
Even an effective tax of 2.4 to 3.6 percent is overstating the effects of the tariff. The tariff rates were already high to begin with. One source reveals that Smoot-Hawley raised rates from 26 to 50 percent; another source from 44 to 60 percent. In that case, we are talking about an effective tax increase of 1.4 percent at most.
Further analysis of the economy during the depression years reveals that nearly two-thirds of the drop in imports between 1929 and 1933 occurred prior to the Smoot-Hawley tariff. What the Smoot-Hawley tariff did do was raise tariffs on particular import sensitive goods, such as Canadian agriculture, that were already on the tariff list and increase the amount of goods to which no tariffs were applied.
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