Confusing Messages

Measures of U.S. economy disagree

April 29, 2005|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN STAFF

Home sales are way up, but retail sales are going nowhere. Orders for durable goods sank, but corporate earnings keep rising. Jobs are multiplying -- but so are the budget and trade deficits.

No wonder the stock market is being jerked back and forth by investors who look as if they can't make up their minds.

The U.S. economy has turned bipolar, the measurements of health apparently contradicting themselves. Even Federal Reserve Chairman Alan Greenspan is hedging his bets, voting to raise interest rates to cool off inflation but warning that there might not be enough oomph in the American engine to overcome federal overspending.

Yesterday offered a prime example of split personality: The Commerce Department estimated that the nation's economy grew by an annual rate of 3.1 percent in the first three months of the year, which is average -- so not bad, right? Except that it was the slowest pace in two years. Not good.

Economists might argue over the economic bottom line, but many agree that international forces have a push-and-pull effect. The world is using more oil, driving up prices and hitting consumers in the wallet. China is buying U.S. currency hand over fist to keep its products cheap for the American market; that cuts into the U.S. gross domestic product and drives up the trade deficit, but it also helps keep mortgage rates low. Low-wage labor abroad means higher profits for U.S. companies but fewer jobs here.

Pay attention to the bad news, some say.

"High oil prices and the trade deficit are mugging growth," said Peter Morici, a business professor at the University of Maryland, adding that these are potent ingredients for "stagflation" -- that 1970s conundrum of rising prices paired with a slowing economy. "We're at one of those turning points where things are heading south."

He thinks Congress and the administration could fix the problem, but they're distracted by the debate over Social Security. The Federal Reserve has been steadily increasing short-term interest rates to fight off inflation -- and is expected to do so again Tuesday -- but it can't affect the cost of oil, which is inflating like nothing else, Morici said. Instead, he argues, higher interest rates will probably just hurt job growth.

Don't panic

But Mark Vitner, a senior economist at Wachovia Corp., advises against a pulling of hair and gnashing of teeth. The economy's performance is perfectly normal, he says. As he sees it, the country is being weaned off the growth formula of tax cuts and low interest rates, and it's adjusting to self-sufficiency.

"It looks like this economy expansion is approaching middle age," said Vitner. "And just like we saw in the '80s and the '90s, when we got to the middle of the decade, ... growth slowed."

The two economists do agree, at least, that a recession is unlikely. But all the uncertainty is uncomfortable.

Growth has undeniably slowed. Gross domestic product, the output of goods and services, increased at an annual rate of 4.4 percent last year. Government figures for the first three months of this year are only an early estimate, but the 3.1 percent increase would be even lower if inventories hadn't risen -- and rising inventories aren't necessarily a good sign.

Signs of slump

Durable goods orders fell 2.8 percent in March, the biggest one-month decrease in more than two years, the Commerce Department said this week. Economists had expected slight growth; some were very worried by the number because it measures purchases of big-ticket items that can be put off -- such as cars and computers.

And the Conference Board reported this week that consumer confidence is down for the third month in a row, a sign of increasing pessimism.

On the other hand, "it all depends on which perspective you're looking from," said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University.

People are expecting too much from the economy, so they're being disappointed, he said. He sees nothing wrong with average growth. And he's not worried about the decline in durable goods orders because the numbers were so high last year that even with a drop, the overall level is fine, he believes.

"You could just view it as luck of the draw," agreed Alan Levenson, chief economist at T. Rowe Price Group Inc. in Baltimore. "I can't get my arms around the notion that there's something fundamental that's undermining the economy on a sustained basis right now. ... I think the economy has sound underpinnings supporting growth."

Corporate earnings are coming out now for the first three months of the year, and they're good. About 80 percent of the Standard & Poor's 500 companies that have reported so far have met or exceeded their first-quarter estimates. As of yesterday afternoon, the average earnings gain was 18 percent, handily beating Wall Street expectations, said Nick Raich, director of research for Zacks Investment Research in Chicago.

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