April 23 , 2003

With the uncertainties of war beginning to die and even a realistic cost of current and further action beginning to develop, will this economy now spring forward?  Certainly, the company executives that are announcing their current and prospective earnings performances do not think so. 

For the most part, as many positive as negative surprises have occurred in the current earnings season.  Considering the uncertainties of war, the impact of serious snow impediments, and the spike in energy prices (a 75 percent price gain at annual rates during the quarter), this probably should be considered a victory for economic performance. 

However, many of the companies met or just slightly exceeded their earnings projections while falling short or showing no growth in revenues.  In other words, vigorous cost containment rather than expanded sales led to what favorable results did occur. 

Furthermore, an initial study of profit gains reported for the first quarter show that the 9 percent increases from previous year level would have been only 1 percent gains if the earnings from oil producers are excluded.  This is significant, because no sales growth means no need to expand while no profit growth means no funds to modernize. 

Even the oil producers have no incentive to spend.  Because most of Iraq's oil infrastructure remains intact, many producers are more afraid of excess world production later this year than they are about the low level of energy material inventories now.  Therefore, those profits are not being converted into new pipelines, more refineries, and new oil fields, as they would have been in the past.

Actually, the 150 million Iraq production shortfall will not be fully replaced by additional Kuwait, Saudi Arabian and UAE production.  Those recent price declines for oil reflect reduced demand as the world economy slows and as spring and its low energy needs develops.  Continued high natural gas prices even as the heating season disappears suggests that energy shortages still can develop if a hot summer, heavy driving, or production disruptions surface elsewhere. 

Therefore, some additional oil and gas development might be needed to bridge the next twelve to eighteen months before more can be extracted from Iraq. 

There are some exceptions to the continued hesitancy of corporate America.  Almost as soon as the statues began to topple, travel bookings began to re-appear.  Code Orange warnings took about 20% off the books of hotels, trip organizers and airlines.  While no rush to come back is apparent, the summer months may be the most normal for travel since 9/11. 

Indeed, the heavily discounted hotel and airline stocks began to stir in the past week.  Can the cruise, amusement park, gaming, and restaurant sectors be far behind?

Despite all these slowly evolving favorable conditions, several economic restraints must be considered.  Auto sales have been running well above trend because of the sales generated by zero financing.  The impact of zero financing is now diminishing (some of the recent trade-ins also had zero financing so the monthly costs cannot be cut).  New home sales now are coming at the expense of emptying rental units.  Not that many potential buyers remain in their apartments. 

Mortgage rates have remained near current levels for more than six months.  While some refinancing continues, the magnitude of refinancing definitely is diminishing.  Also diminishing is the power of the average worker's pay check.  A year ago, that pay check could buy about 2.5 percent more goods than in the previous year.  Today, because of higher energy prices, there is no more purchasing power in that check than a year ago. 

Furthermore, almost half a million pay checks were lost in the past two months.  Some of the decline might reflect reservists being called to another duty.  However, help wanted employment (that would have replaced at least some of these reservists) also has fallen.  The result is fewer paychecks as well as a less potent paycheck for those who still have them. 

A weakening dollar has permitted some growth in sales abroad.  In January and February American capital goods were sold abroad in increasing quantities.  Anecdotal evidence suggests that these sales have stalled with the onset of the war and the respiratory illness that frightened parts of Asia.  Moreover, a lowering of projections for world growth will limit the extent that American producers can use the lower dollar to recapture markets abroad. 

In short, even the removal of some uncertainties will not be enough to generate an adequate recovery.  More is needed.  Economists will argue the form of any tax reductions that might be proposed, but most of us will cheer tax cuts that will allow a can change in the tax withholding tables before the fall spending season.

We might wonder how low interest rates may fall, but most economists would see some merit in an even lower short term interest rate target than currently exists. 

This economy might need more than merely removing war uncertainties.  That latest rise in initial unemployment claims suggests that we should not wait too long to see what must be done. 


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