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The Nation

The Economy Revs Up, but Can't Overtake Uncertainty

Forecasters' uncertainty about a recovery worries politicians. Spurt's effect on job market is unclear.

October 26, 2003|Peter G. Gosselin | Times Staff Writer

WASHINGTON — As 2003 winds down and the presidential campaign ramps up, most mainstream economists agree that the U.S. economy is expanding at its fastest pace in four years.

When the gross domestic product for the July-September quarter is announced Thursday, it is expected to show that the economy barreled forward at an annual rate of 6% or perhaps even 7% -- a performance unmatched since the glory days of the '90s boom.

Although growth is likely to slow somewhat between now and the end of the year, most analysts think that it will remain strong enough to ensure a second-half growth rate of 5%.

That would put the current period nearly on par with late 1999, when the combination of a rollicking stock market and fear of the Y2K computer problem set off a business buying spree unmatched since.

"We've already seen higher-tempo growth, and everything seems to be falling into place for a full recovery," said Allen Sinai, chief economist with Decision Economics in New York.

But Sinai and many other economists stop just short of saying that a self-sustaining recovery is underway. "I want to see more evidence," said the veteran forecaster.

The reluctance of analysts to declare a recovery is made up in equal parts of past forecast failures, doubts about corporate America's investment plans and genuine confusion over what's happening in the nation's labor markets.

Their uncertainty crops up in a variety of ways. Among them: a sudden infatuation with off-beat economic indicators like cardboard box sales, and a tendency to offer forecasts that take away with one hand what they offer with the other.

Some prominent forecasters, for example, think that the economy will grow quickly in the first half of 2004, but then slow in the second half. Others say that it will grow like gangbusters the entire year, but do little to bring down unemployment.

The confusion is driving the political world nuts, because 2004 is not just any year, but a presidential election year.

"Politicians would love some certainty about which way the economy is going, but they're not getting it," said Karlyn Bowman, a polling expert with the American Enterprise Institute in Washington. "It makes it terribly hard to plan a campaign."

These difficulties may be especially troublesome for President Bush, whose father's administration was brought down by a sour economy and whose own ratings as an economic manager have never been particularly high.

If there's any consensus about the economy's likely effect on the presidential campaign, it seems to be a view articulated by Los Angeles economist Donald Straszheim.

"The economy will be improving enough by election day [that] it won't be a big negative for the president," Straszheim said.

The current cycle of recession and recovery has confused economists from the get-go. Instead of the traditional pattern of overstretched consumers reducing demand, causing business to cut production, lay off workers and push the economy into recession, events seemed to run in reverse order.

An overextended corporate sector suddenly slashed its purchases of everything from factories to fiber-optic cable, forcing layoffs and a downturn. Aggressive interest-rate reductions by the Federal Reserve, then a string of tax cuts by the Bush administration, have kept consumers spending while the economy has awaited a return of business investment and rehiring.

In the view of economic optimists, a reverse-order recovery is well underway.

The latest earnings reports show that corporate America has slashed its way back to profitability. With 322 of the 500 companies in the Standard & Poor's index reporting by Friday, earnings for the just-finished third quarter were 19.5% above last year on revenue growth of 7.6%, according to Joseph Cooper with earnings analyst Thomson First Call. Most of the improvement is due to cost cutting, Cooper said.

Companies have used some of their newfound profits to invest, if not in new factories, then at least in equipment. Business equipment and software investment grew at an 8.3% pace in the April-through-June quarter and is thought to have climbed at an even steeper 15% rate in the July-through-September quarter.

"Contrary to the popular story that it's all the consumer, the fastest-growing sector of the economy in the last six months has been business investment in business equipment," said John Lipsky, chief economist of J.P. Morgan Chase & Co. in New York.

As business investment has picked up, so, according to the optimists, have other parts of the economy. The beleaguered manufacturing sector has shown some signs of revival. Railroads, truckers and package delivery firms have registered their first sustained growth of volume in three years.

"It is no longer an economy being driven solely by the consumer sector whose growth is being largely offset by a contraction in the business sector," said James W. Paulsen, chief economist with Wells Capital Management in Minneapolis.

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