Monday, July 12, 2004

The Slowdown Express seems to be getting a little more press now.
. . . stock prices have faltered since the end of June, as corporate earnings have disappointed investors. And bond prices have risen, as evidence of economic fragility has allayed fears that inflation will accelerate. The recent sluggish economic indicators have inspired a note of caution in forecasts which until now had been unabashedly bullish.

"Economic data over the next several weeks are likely to follow the theme of slower growth with continued inflationary pressures," wrote Andrew Tilton, an Goldman Sachs economist, in a note to clients. "In addition to a weaker trend of consumer spending, we expect some modest deceleration in factory sector activity."

But, despite the scattered straws in the wind, most economists remain confident that economic growth is not collapsing but is shifting to a lower, more sustainable rate.

"The economy has come off its peak in the last couple of months," said Martin A. Regalia, chief economist at the United States Chamber of Commerce. "People have dropped their forecasts to about 3.5 percent. That's still a pretty solid number."
It's not clear whether 3.5% refers to 2004:II or to the entire year; in light of this report on the latest Blue Chip survey, it seems to be a prediction for 2004:IV. Note also that the Blue Chip economists are still predicting 4.5% growth for the year as a whole. Assuming these forecasts are correct and assuming equal growth over 2004:II-III, GDP growth for the second quarter of this year will come in at a stunning 5.2%!! Instead of throwing much needed cold water on the idiotic forecasts of the Bond Market Association, it only throws on dry tinder!

Assuming the 'wealth affect' growth strategy has reached its end (although one shouldn't go too far out on a limb on that one), are we any closer to a sustainable replacement for it than we were this time last year?
. . . even as debt-financed consumption waned, most economists expected two new sources of growth to kick in. First, a rising number of jobs would increase the overall wage pie - helping maintain consumer spending. Second, businesses, which spent the earlier part of the recovery paying down the debt amassed during the dot-com boom, would again start investing in new equipment.
Well, the second source of growth did kick in, especially driving the big growth spurt in the second half of 2003. Since the first source never did kick in, however, the second has mostly contributed to overproduction and deflation, especially in the durable goods sector where this investment was concentrated.

5.2% . . . I'm still laughing over that one.


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