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Monday, June 16, 2003

Looking on the Bright Side of Life

Well according to some people things are now finally on the up and up. Of course they said the same thing last year, and the year before. Bereft of any kind of theory as a guide to understanding what may be happening, they would say this, wouldn't they. Sorry, what do they call themselves, 'astrologers' or 'economists'. Since the explanations for the problem seem to consider almost every possible explanation bar those which may in fact be operative, it is hard to imagine they will get things any better this year than last year. Where is the learning curve? :

For the past three years, the U.S. economy has taken hits from the bursting stock market bubble, a recession and terrorist attacks. Conditions now, finally, offer the prospect of better growth over the last six months of the year. Of course, forecasters acknowledge, they made similar predictions in 2002 and 2001, and were proved wrong. They now insist that new tax cuts, a weakened dollar, falling interest rates and other positive forces seem to give their latest optimistic forecast a better chance of becoming a reality. "We have been waiting and waiting for the economy to rebound, and then something happens and things fall apart. But this time we have a lot more stars coming into alignment," said Diane Swonk, chief economist at Bank One in Chicago. For one, manufacturing companies that have shed more than 2 million jobs over the past three years are starting to see omens of better days. That is due in part to the weaker dollar, which makes their products more competitive on foreign markets.

"We are seeing a very nice improvement in orders," said Tony Raimondo, president of Behlen Manufacturing Co. of Columbus, Neb. Demand for the company's steel buildings and other metal products has risen 20 percent in recent months. Jerry Jasinowski, president of the National Association of Manufacturers, says other companies are reporting similar increases. The trend raises hopes that the decline in manufacturing employment may end soon as businesses that have slashed inventories start to step up production to meet demands of new orders. Help on the demand side is coming from the $330 billion tax cut just passed by Congress. Consumers will begin seeing their shares in paychecks starting next month.

David Wyss, chief economist at Standard & Poor's in New York, said he believed the tax cuts should add as much as 1.5 percentage points to growth over the next year. As measured by the gross domestic product, the overall economy has averaged growth of less than 2 percent over the past nine months. Wyss is predicting growth will jump to a 3.5 percent rate in the July-September quarter and 5 percent in the final three months of this year. "The government is doing its part to get the economy going again," Wyss said. "We are running big deficits, reflecting higher spending for defense and the tax cuts."

He said growth should average between 4 percent and 4.5 percent for all of 2004. That pace would begin to make a dent in the unemployment rate, which was at a nine-year high of 6.1 percent in May. Improved growth cannot come too soon for incumbent politicians such as President Bush (news - web sites), who face re-election in 2004. Many analysts believe the jobless rate will peak at around 6.4 percent this summer before gradually improving as the economy grows. "To reassure his re-election, Bush needs to see the unemployment rate closer to 5 percent than 6 percent," Swonk said. "That will make voters happier with incumbents."

Most analysts believe the country's first recession in a decade, which began in March 2001, probably ended in December 2001. The rebound has been jagged, however, with one quarter of strong growth followed by a weaker one as the economy has had to deal with different kinds of jolts. A year ago, analysts thought the economy was poised for a sustained takeoff. Then the stock market began to tumble again because of worries about corporate accounting scandals. Also, rising oil prices spurred by war worries before the Iraq invasion sent consumer and business confidence into tailspins. Many of those negative factors seem to be fading, helped by the tax cuts to bolster consumer confidence and a weaker dollar that has lifted manufacturers' fortunes.

The Federal Reserve, which has driven interest rates to a 41-year low, is signaling readiness to reduce rates again. The goal would be to ensure the nation's prolonged period of economic weakness does not lead to a Japanese-style bout of deflation, falling prices that would make it even harder for the economy to gain steam. The central bank's next meeting is June 25. Is it possible that all the expectations of stronger growth could be dashed again? Analysts say the biggest dangers are political crises in the Middle East, North Korea or elsewhere that could undermine the stock market rebound, drive down consumer confidence and lead to higher oil prices. "The things to watch will be energy prices and consumer and business confidence," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "But let's hope we are right this time around."
Source: Yahoo News

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