Saturday, August 14, 2004

What will the US economy do? Probably more slow growth

I have had two emails and two phone calls this week asking my opinion on the US economy. So I might as well share with you my answer.

Short answer? Tough to say, but I think we will continue to see slow growth.

A caveat, gauging how the US economy will do in the future is only slightly easier than determining how the Buffalo Bills will do this year (BTW my prediction: 9 and 7).

Events and news that suggest the economy is doing well:

  1. The economy has been doing well: the revised numbers for the first quarter suggest a 4.5% increase in GDP. And like any giant economy, it takes some time to change course. Thus, whatever happened in recent past is likely to continue for some time. Unquestionably, the rate of the expansion is slowing, but it is unlikely to go from fairly solid growth into negative growth in a short time frame. Moreover, most Leading Economic Indicators are still heading up, even though their rate of growth has slowed considerably.,,
  2. While job growth has slowed and only 32,000 new jobs were created in July , iInitial jobless claims were down slightly this past week.
  3. In spite of rising energy prices, inflation seems low.,,
  4. July retail sales that were again up.
  5. While public opinion suggests the contrary, the latest numbers show strong growth in the US manufacturing sector.
  6. The Fed, who presumably has better information than any of us, signaled its belief that the economy was doing well as it raised interest rates (to slightly slow the economy and prevent inflation) for the second time this year.,

Events that suggest the economy is slowing down

  1. Consumer confidence as indicated by The University of Michigan Index of Consumer Sentiment Index fell in August.
  2. The US trade deficit swells in June as Exports dropped an almost staggering 4.3% in June. [Their largest drop since September 2001],
  3. Oil Prices are near or at record highs. This will serve as a drag on growth at a time when the economy is already showing signs of slowing. So far this has not corespsonded to rapidly rising gasoline prices in the US, but assuredly higher oil prices will negatively impact the economy.
  4. The US Budget deficit is rising, leaving government stimulus projects as unlikely and costly alternatives.,
  5. Job Growth has ground to a near standstill. Only 78,000 new jobs in June and 32,000 in July.,

Ok, so get off the fence. What will the economy do?

It is a very tough call but I will go with the Fed's information advantage as being the most important factor. Thus, my prediction (which is more a guess than a prediction) is that the US economy will continue to grow at a slow (less than 2.5%) rate for the rest of the year. That said, if I were on the Fed, I think I may be a bit reluctant to raise rates again until there is some better economic news.

From a political side, it will be interesting to watch the presidential candidates do battle over the economy. With so much economic data to choose from, both side will have plenty of ammunition to support their claims.

A few useful Web sites that track economic events

  1. Has a very cool "scorecard at the bottom of the page. Excellent!
  2. Not as good as t used to be, but still pretty good, up to date and thorough.
  3. Business Week's Economy -good, but not as complete as some
  4. The Fed's site for economic data. If you like your data without interpretation.
  5. Maybe the best. Yes it is a pay site, but a VERY good pay site!!
  6. MSNBC--As the above links suggest, I do use this one quite a bit.
  7. The Washington Post's Economy Page - More in depth coverage and analysis than many of the "news" sites.

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