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 we thought. 

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 more efficient.     

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 year. 

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. 

This truly is an economy where only half the glass has liquid.  Sometimes we dwell at length on why it is half empty.  Maybe we should take a little time to notice that a glass that could be empty actually is half full.  








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