August 13 , 2003
Economic news continues to be decidedly
mixed. That surprisingly strong
second quarter GDP gain needed the strongest one quarter increase in defense
spending since the Korean Conflict. Unless
we plan to have another war this quarter, new sources of growth need to be
uncovered merely to replicate those second quarter gains.
Rising oil prices are threatening once again
to exhaust the added purchasing power that reduced tax liabilities are creating
for families. Hours worked declined
more from June to July than it did from the first quarter to the second quarter.
Almost a half million jobs have disappeared since the year began.
To be sure, some of the information is
inconsistent. Why are unemployment
claims falling below recession levels while jobs are vanishing?
Why are purchasing managers seeing more business but employers are
announcing more layoffs (up 43 percent from the previous year)?
In this potpourri of economic enigmas, some
conditions are definitely improving.
While heat waves are hitting Texas and parts
of the West, the cloud cover east of the Mississippi has held down demand for
electricity. Natural gas supplies
are building and the once feared winter shortages might be more manageable than
Those cool days have also done wonders to
our crops. More than 70 percent of
the corn and soybean fields are in good to excellent condition.
Records now seem likely in both crops despite drought further west.
While no one wishes another war to get
decent GDP growth, there are candidates for improved growth.
First, inventories again are being
liquidated. This reduced jobs in the spring but will require increased production to
meet Christmas needs. Strong growth
toward the end of the year is possible.
Second, fixed investment is showing some
improvement. After declines in the
nine of the past ten quarters, expenditures on private structures grew modestly
in the spring. Stronger growth is
possible later this year.
Third, computer hardware and software sales
are growing. The return to profit
growth in corporate America is increasing the willingness to spend in order to
improve efficiencies. Plant
construction continues to decline but those remaining plants are becoming even
Fourth, Asia is recovering from the SARS
scare. Those forecasts of 2 percentage point reductions in growth in that region are
being revised upward. While exports
did not grow during the spring, sales managers are becoming increasingly
confident that they will get international sales growth for the remainder of the
Although the fifth issue is the likelihood
that a negative force will diminish, that should be viewed positively for future
economic growth. More than a
percentage point of economic growth was displaced by additional imports in the
spring. Improved efficiencies and
the dollar's decline in recent months should diminish the speed by which imports
take away American jobs in subsequent quarters.
And the most important improvement is in the
balance sheets of previously unbankable companies.
While funds always were available to those large companies with strong
balance sheets, their small company suppliers and customers were struggling
early in this recovery. Now, many
of those small companies are finding friendlier greetings from loan officers.
Moreover, we have experienced a few months
of strong stock market gains and improving leading economic indicators.
Even the weak employment report for July had a silver lining.
Growing temporary employment is a precursor to permanent jobs.
And jobs grew outside of manufacturing.