September 24, 2003
With preliminary retail sales for August already in and
Walmart hinting that its September sales will be at the upper end of its sales
plan, consumers appear to be responding to the reduced tax withholding
tables and child credit checks that occurred this summer.
First estimates of the Christmas season are for sales
growth of 5.7 percent, well above the 2 percent that stifled job growth a year
ago. Is this the beginning of
sustainable recovery from the recent recession?
In 1958-60 and again in 1980-82, similar initial spurts in
consumer spending vanished into renewed recession. In most other recoveries, however, once the consumer
began loosening the purse, economic growth continued until the economy reached
or exceeded high levels of sustainable non-inflationary growth.
In those two special cases, the recession did not lower
inflation. When spending resumed,
prices moved up faster than wages. In
1960, government spending and monetary policy were restrained to stop an outflow
of currency. In 1982 the unchecked
inflation forced a dramatic restraint in monetary growth from the Federal
Reserve as our currency once again fell under international scorn.
By contrast, the Federal Reserve clearly indicated that
restraint is not even on the agenda at their regular meetings.
Short term interest rates should stay low for a sustained period of time.
While this assurance does not guarantee that another 1960 or 1982 stall
will not occur, the odds that tight monetary policy will snuff out this recovery
are very low.
Furthermore, the inflationary forces that could exhaust
consumer buying power are nowhere to be seen.
I am worried that high energy prices could exhaust those additional
dollars from reduced taxes at the gasoline pump or through the monthly heating
bill, but conditions now are improving there.
Those $32 per barrel oil prices are now below $27 and appear to be
slipping further. Those 3 trillion
cubic feet of stored natural gas that appeared so unlikely last spring are now a
reality this fall.
No one will bet that a cold winter, another upheaval in
Venezuela, turmoil in Nigeria, sabotage in Iraq, or some other surprise to
disrupt the flow of oil will not occur. But
our capacity to handle such events definitely has improved.
So, if we do not need to worry about higher commodity
inflation or restrictive government policy snuffing out these hints of economic
growth, what do we need to worry about?
Of course, every forecaster continues to worry about the
threat of terrorist attacks that again could alter business and consumer
spending on travel, shopping, and investing.
However, most people no longer are holding back because something could
happen. They might, if something
Our biggest worry now is the behavior of corporations.
They have been trying to cut costs and restructure their companies to be
competitive even if recovery does not arrive.
The result has been a massive outsourcing of suppliers (and their
workers) to offshore facilities, and a dramatic surge in worker productivity at
home. Indeed, those American
workers who have jobs now are the most productive in the world.
None of this behavior is unusual during a recession and its
early aftermath. The better
corporate structure allows corporate profits to improve even before corporate
investment. Companies become credit
worthy as their balance sheets improve. This
increased ability to borrow soon leads to the exploitation of new opportunities.
That behavior is what creates the new jobs and the additional capital
So far, most corporations have been unwilling to look for
opportunities. Only in the past two
months have banks begun to see increased loan activity.
(This is one of the key lagging indicators that signal improving times
ahead when it begins to rebound). Will
they remain content to be smaller but more efficient entities?
Without more corporate risk taking, we do not get more
jobs. Indeed, the job displacement
has been unusually strong in this downturn.
Many of the manufacturing activities that no longer are competitive with
foreign producers already have vanished. The
new job titles that inevitably develop during economic expansions are not on the
So, when the burst of activity generated by lower tax
liabilities runs out, consumers will need to be joined by new workers with new
paychecks to sustain strong spending. Those
paychecks will be offered by corporations that are seeking opportunities, not
just cutting costs.
I have developed a test to determine whether a company is
ready to expand. As the head of GE
said in Atlanta two weeks ago, every major corporation needs a China policy.
If the CEO thinks this means using Chinese to produce American goods, the
company remains in a cost cutting mode. If
this means finding Chinese partners to exploit an economy growing 8 percent a
year but still woefully lacking in infrastructure, consumer goods,
transportation equipment, power generation, communications, etc., then that
company is ready for the next expansion.
Now if we can only see more signs that companies are seeking opportunities.