December 6, 2004
by Irwin Stelzer
There is little in the spate of economic statistics that was published this week to upset economy-watchers here in America. The economy is growing at an annual rate of 4%. The Institute of Supply Management reports that both the manufacturing and service sectors are expanding at an increasing rate. Share prices are showing strength, and the housing market remains buoyant.
Incomes are rising. Even usually glum farmers are finding reason to cheer: their incomes are up 25% on last year's levels. Oil prices are falling as high inventories and warm weather relieve supply worries, and as Iraq slowly but surely returns to world markets in a major way.
True, the job report for November disappointed, with the new jobs created coming in at 112,000, rather than the expected 200,000. But the economy has created over two million jobs in the past year, and the unemployment rate is a satisfactory 5.4%. The hiring of college graduates is up 20% over last year and the grads' pay offers are between 4% and 7% higher than last year according to the Collegiate Employment Research Institute.
It is now all-but-certain that by the time George W. Bush takes the oath of office late in January he will no longer have to contemplate going down in history as the first president since Herbert Hoover to witness a loss of jobs during a complete term in office. Instead, Bush will be able to claim that his tax cuts enabled the American economy to avoid a recession despite the fact that he inherited a declining economy from Bill Clinton, and then had to cope with the economic consequences of the trauma of September 11.
Add to this the so-far benign effect of the falling dollar. Exporters are starting to report increased sales as their goods become cheaper in overseas markets, and their foreign competitors' products become dearer here in America. There is some worry that the falling dollar might induce Asian and other holders of large amounts of dollars and dollar-denominate assets to begin dumping their holdings, which would drive up U.S. interest rates and slow the economy, but the administration is confident that such actions would hurt the holders of dollars too much for them to adopt such a policy.
Americans with non-refundable tickets to Europe may be in for a shock when they arrive in their destination of choice, but from the point of view of the American economy it is more important that overseas tourists are descending on America's shops and malls and shopping until they drop. And American consumers are crowding into high-end retail shops in record numbers.
That should help to make this Christmas a rather merry one for most of America's retailers. There was some concern when mighty Wal-Mart reported that sales the day after Thanksgiving, known as "black Friday" because it is the day that retailers count on to turn red ink into black, were disappointing. But a sober second look at the data shows that Wal-Mart gambled that it would be able to keep its tills ringing -- or its swiping machines swiping credit cards -- without offering significant discounts. It lost its bet, as consumers concentrated purchases on stores offering deep discounts on digital cameras, cell phones and flat-panel television sets. Still, Wal-Mart did manage an almost 9% increase in November sales, not bad by any standard other than that of the giant chain.
Of course, in the world of economy-watching, no life is perfect. It certainly seems to be the case that high gasoline prices have eaten into the spending power of the lower-income customers on whom Wal-Mart and other discounters depend. On the macro level, the Bush administration has yet to put in place its economic team, or to reveal its plans for tax reform and for reform of the social security system. Indeed, it may well be that tax reform is dead. Important congressmen are saying that unless the president pushes through major changes by 2005, he can forget about tax reform. The next year will see all of the House of Representatives and one-third of the Senate up for re-election, and the prospect of facing the voters does not increase their eagerness to end some of the special tax benefits so beloved of their constituents.
As for pensions reform, unless the President can figure out how to partially privatize the system without driving up the budget deficit, his prospects for success are limited. Talk in Washington centers around various schemes to bring the system into long-run solvency by surreptitious reductions in benefits. But congressional Republicans have told the White House that they will not back the President unless he can get a substantial number of Democrats to go along with him. They simply do not want to face the electorate as the only party that voted to reduce retirees' benefits.
But these issues will have to wait until the strains of the music accompanying the last dance at January's inaugural ball die down. Right now, America's cities are aglow with Christmas decorations and happy shoppers. There is an increasing optimism that elections will be held as scheduled in Iraq, proving that those who died there did not die in vain. There is also a sigh of relief that the American elections did not result in a 2000-style standoff: the only sad faces are those of the tens of thousands of lawyers denied their fees when litigation proved to be minimal.
The Federal Reserve Bank of Dallas summed it up well last week: "Reports from the twelve Federal Reserve Districts generally paint a picture of continued economic growth from mid-October to mid-November, with a number of areas improving. Eleven Districts [all save Cleveland] reported expanding economic activity…". Not a bad situation for the economy to be in with the Christmas shopping season full upon us.
A version of this article appeared in The Sunday Times (London).
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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