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 does happen.

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 spending. 

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 horizon. 

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. 


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