ECONOMY - Hopeful omens

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Wash Times

July 9, 2001

Hopeful economic omens

Donald Lambro

Is the U.S. economy growing again? The question is being asked by everyone from government policy-makers to investors and the answer appears to be yes. A hopeful sign that America's economic slump has ended was seen in the latest numbers on new factory orders, which showed their biggest jump in almost a year. What was especially heartening was the stronger demand for cars, appliances, industrial machinery, and in a strong signal from the technology sector semiconductors. The Commerce Department's data for May showed factory orders rising by a healthy 2.5 percent, much higher than the 1.5 percent that analysts had forecast. Discounting transportation orders, factory orders rose by 2.3 percent after a nearly 14 percent drop in April. The depressed manufacturing industry, which is the backbone of our economy, welcomed the news. "This rise in orders is quite encouraging and points to a fragile but emerging recovery," said Jerry Jasinowski, the president of the National Association of Manufacturers. Other hopeful signs last week pointed to a manufacturing comeback. The National Association of Purchasing Management reported on Monday that its key measurement of industrial activity rose in June, registering its best performance since December. There is always danger in reading too much into one-month numbers. No one has predicted much for the current second quarter after the anemic 1.2 percent growth rate in the first quarter. But the activity reported gives us hope. Climbing 3.5 percent, new car and truck orders turned in the biggest jump of all. This is causing inventory to shrink and could mean increased factory production and announcements of returning workers to idled plants cannot be far behind. Another hopeful sign is the rebirth in the computer-technology sector. The increasing factory orders were largely due to a breathtaking 32.5-percent jump in semiconductors. Also looking up in manufacturing: industrial machinery orders increased 2.7 percent, following a 0.8 percent gain. Home appliances and electrical equipment shot up by 0.9 percent. This follows recent reports of increases in consumer spending and an uptick in consumer confidence that the economy is going to improve in the coming months. One of the big complaints about the effectiveness of fiscal and monetary policies to jump-start the economy is they often come too late and take too long for much immediate influence. This time perhaps due to nothing more than blind political luck both fiscal and monetary incentives are especially well calibrated to do the most good, just when the economy needs the additional lift on takeoff. Alan Greenspan's six straight interest cuts are beginning to kick into the economy's blood stream. So much so that the Fed decided that the economy really needed only a quarter-point cut last month instead of the half-point cut that many market analysts wanted. Clearly, the Federal Reserve Board decided that the economic data showed that the economy was getting back on track and that its six straight rate cuts were working. Consumer loans and credit card rates are cheaper, people are buying and much lower home mortgage loans are stimulating existing and new home sales, and the chances of a recession are virtually zero. Meantime, while the Fed's monetary policy is working, President Bush's income tax rate cuts are timed to give the U.S. economy another prolonged shot of adrenaline. The retroactive tax cut rebate checks that will be mailed this month will help a lot, because so much of it will be spent. Most of the checks about $40 billion will go out through October to about 95 million taxpayers. Single filers are expected to receive $300, household heads receive $500 and married couples will receive up to $600. But there's more. The 1 percent reduction in tax rates over the 15 percent bracket, effective July 1, is now showing up in lower paycheck withholding rates. There is not as much media attention as the rebate checks, but the gradually lower rates will have the most economic punch of all, injecting more liquidity into the economy week after week, month after month, year after year. These higher tax rates will drop another 1 percent in 2004 when, as it happens, the country will be in another presidential election year, and again in 2006. President Bush's chief economic adviser, Larry Lindsey, says the tax cuts will add 1 percent to this year's growth rate, perhaps 1.5 percent. The consensus forecast for the fourth quarter is about 2.7 percent growth. Treasury Secretary Paul O'Neill tells me he thinks the economy can get back to 3.5 percent to 4 percent growth in the coming year. Clearly, the economy is already in the beginning stages of a major recovery and the tax and interest rate cuts are only going to give that takeoff a lot more propulsion over the next six months. Once Wall Street recognizes this, investment capital is going to pour back into the market and stocks are going to soar. Look for the Dow to approach 12,000 before the year is out. The American economy is coming back.

-- Anonymous, July 09, 2001


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