what do you expect from such a big cut in interest rates (during 2001)? It shouldn't surpise anyone that this stimulates the economy. However, it is notable that most of the stimulus is in housing and services and is based on increased consumer debt. How much more can US consumers afford to see their debt/income ratios rise? and how much more can the US avoid over-building in the housing industry? and how more can the Fed prop the stock market's price/earnings ratio up, preventing rich consumers' assets from falling?
As I've said before, this looks a lot like a W-shaped recession. A lot of the optimism comes from extrapolating the first upward movement of the W into the future, ignoring the second downward movement that as a side-effect would encourage people and corporations to move toward having reasonable balance sheets, allowing the second upward movement to happen several years from now (assuming that the US doesn't get stuck in a Japanese-style L-shaped situation). Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine > -----Original Message----- > From: Ian Murray [mailto:[EMAIL PROTECTED]] > Sent: Wednesday, March 13, 2002 12:57 PM > To: [EMAIL PROTECTED] > Subject: [PEN-L:23934] Growth ahead... > > > from the March 13, 2002 edition - > http://www.csmonitor.com/2002/0313/p01s01-usec.html > > Economy in sudden acceleration > The poll's economic optimism index jumped to a strongly positive > 62.9 as Americans eye a rebound. > By David R. Francis | Staff writer of The Christian Science > Monitor > > In not much more than a week, perceptions of the US economy have > shifted decidedly, from glimmers of recovery to visions of > clear-cut growth. > > Acceleration is the trend from the trading floor of the New York > Stock Exchange to the factory floors of General Motors. > > The stock market has rediscovered the word "up." Unemployment > edged downward last month, defying most forecasts. And consumer > confidence rose solidly yesterday in a new Christian Science > Monitor/TIPP poll. > > Debate among economists has shifted from when a recovery will > begin to how strong it will be. A few even question whether the US > really had a recession last year. (Only in the third quarter did > the economy actually shrink.) And while some forecasters say heavy > debts could restrain America's high-spirited consumers, others > talk of full-fledged 5 percent growth. > > "The underlying trend of the economy is extremely positive," says > Brian Wesbury, chief economist of a Chicago brokerage firm. "It > could be another 10-year expansion." > > Mr. Wesbury had been saying recovery would be slow in the first > half and strong in the second. Now he predicts a strong recovery > for the entire year, possibly above 4 percent. > > Particularly encouraging, Wesbury says, are numbers showing an > upturn in the hard-hit manufacturing sector. > > Consumers, too, sense better times ahead. The Monitor/TIPP poll, > conducted over the weekend, shows a sharp jump in its index of > economic optimism, which jumped to 62.9 from 60.4 in February and > from a low of 52.1 in a poll completed Sept. 9. > > "Economic confidence is sweeping the nation, across all regions, > age groups, income levels, and party affiliations," says Raghavan > Mayur, president of TIPP, a unit of TechnoMetrica Market > Intelligence that conducted the poll. The poll, which surveyed 921 > Americans, is the first broad indicator of consumer confidence > released each month. > > Economists have a similar cheerier view. Federal Reserve chairman > Alan Greenspan, for example, sounded notably more upbeat in Senate > testimony last Thursday than he had in the House a week earlier. > > "We have seen encouraging signs in recent days that underlying > trends [in demand for goods and services] are strengthening, > although the dimensions of the pickup remain uncertain," Mr. > Greenspan said. > > Indeed, some say the economic engine could sputter as consumer > spending maxes out. But for now, those gloomier economists can > only apologize for missing the positive surprises. > > "How could I be so stupid?" asks an embarrassed Stephen Roach, > chief economist in New York of Morgan Stanley in a Monday > commentary. He still sees himself as "the last living economist in > America" to talk of economic relapse later this year. > > A host of numbers lifted the outlook of the economists. > > Retail chains had their best month in two years in February, with > sales rising 6 percent from a year earlier. Worker productivity > continued its astonishing upsurge, rising at a 5.2 percent rate in > the fourth quarter of 2001. > > Economists generally agree on why the upturn is occurring. > > . The Fed cut interest rates 11 times last year, making many debts > easier to finance and bolstering home construction. > > . Washington has conducted a stimulative fiscal policy. Within a > year, the federal budget has moved from a surplus of $255 billion > to a small deficit (or tiny surplus). Extra spending on national > security has helped boost economic output. > > The passage by Congress of an economic-stimulus package last week > is generally seen as late, but an added 13 weeks of unemployment > insurance will help maintain the spending of the unemployed. > > . Consumers kept up a buying spree. "We continue to do a great job > of living beyond our means," says David Wyss, chief economist at > Standard & Poor's. Consumers keep buying cars and furniture, > despite record debt levels and layoffs. > > Most economists figure on the economic pace stepping up as the > year moves forward. But Susan Hickok, chief economist at > Prudential Economics in Newark, N.J., expects the Fed to start > raising interest rates as early as May to keep the recovery from > heating up so much that inflation could restart. Ms. Hickock has > been forecasting a 5 percent pace of recovery for months, far > above the average view. > > A key measure of the nation's money supply, known as M2, stands 10 > percent above what it was a year ago. That is considered rapid > growth. Money is the fuel for economic growth. Too much of it, > though, can fuel inflation rather than real growth. > > Hickok suspects the Fed will gradually raise the "federal funds > rate," the rate at which banks loan money overnight to other > banks, from 1.75 percent to 4 percent. That rate she describes as > "normal" with inflation at 2 percent. > > But for now, optimism reigns. > > The economy is "picking up now," says Freddy Sanchez, a > participant in the Monitor/TIPP poll who works for Hyde Moulding > in Queens, New York. New orders for plaster mouldings have risen > with the vigor of housing construction across the country. "I like > Greenspan." >
