Economy is looking happier, but job growth is essential

October 26, 2003|By JAY HANCOCK

HOW STRONG is the recovery?

Pretty darn strong, if you read the headlines. The economy is running at its fastest pace since the 1990s bubble went pop, and the stock market and some business seers expect more of the same.

But look beneath the surface and not everything is so rosy. The national employment and business apparatus still labors under the burdens of debt and idle capacity, and many analysts would not be surprised if the country fell back into a slump.

In fact, the economy is poised on a fulcrum of possibility and uncertainty.

Growth in output and consumption have been strong enough that they may lend their momentum to a sustained expansion. But forward momentum is not guaranteed, and if it flags it will produce its own self-reinforcing consequences in the other direction.

The good news is abundant.

Gross domestic product - the value of all goods and services produced in the United States - accelerated in the spring and blasted off over summer.

GDP grew at a healthy annual pace of 3.3 percent in the quarter that ended in June, up from a 1.4 percent rate in the first quarter. And investment house Morgan Stanley estimates that the GDP pace nearly doubled in the quarter that ended last month, to an annual rate of more than 6 percent.

The nation's employers have actually been hiring more people lately than they have been letting go.

The economy added jobs last month, the first time that happened since January. About 2.7 million jobs have disappeared since the 1990s bubble popped, and the country has shed jobs in 27 out of the past 33 months. But employers added 57,000 positions last month, which was not a hiring spree but was a welcome change of trend. Consumers are consuming, which they have done almost without letup since the early 1990s. Retail sales were 7.5 percent higher last month than in September last year. Fueled in part by President Bush's tax cuts, that was the biggest year-over-year gain since April 2000, when the stock market started collapsing.

Commodity prices are soaring, which implies stronger demand, scant supplies and higher profits for producers of basic materials. So are home prices, which have been supercharged by extremely low interest rates.

Corporate profits are rising. And the economy is growing so quickly that analysts such as Prudential's Ed Yardeni are starting to wonder when the Federal Reserve will raise interest rates again after years of cutting them.

But we're not off to the races for sure. The economy looks like a cartoon character who has dashed toward some new destination but whose hindquarters haven't caught up with his front. You don't know whether the next frame will show his backside zooming forward, too, or his head getting yanked back to the starting line.

Enormous imbalances encumber the economy. Consumer and government debt are staggering.

Consumer debt rose by a higher-than-expected $8.2 billion in August, to $1.956 trillion. Consumers' debt payments as a portion of household income are 13.3 percent, up from less than 11 percent in the 1980s.

Collectively, homeowner's equity stake in their houses and condos has fallen to 54.3 percent, according to Yardeni, a record low and down from about 70 percent in 1980.

The federal budget deficit hit $374 billion in the recently ended fiscal year.

Interest payments on the $4 trillion U.S. debt came to $318 billion for the fiscal year, a staggering 18 percent of the receipts reported for last fiscal year by the Office of Management and Budget.

Debt levels are critical because the higher the hock, the lower the borrowing capacity. The lower the borrowing ability, the lower the spending. And the lower the spending, the lower the demand for products and services that will put Americans to work.

Demand is especially important now because of the slack capacity in many parts of the U.S. economy.

Even with the tax cuts and decent consumer spending, industry was using only 74.7 percent of its available factory lines, electricity generators and other equipment last month. And 9 million Americans were unemployed.

Output has risen without a significant drop in unemployment because companies have continued becoming more productive, putting out more goods and services with fewer people.

That's good for corporate profits and low prices, but if this economy is going to go anywhere for the long term, we need to see job growth. And it could go either way.

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