Is our national economy simply slowing or in actual decline?
At the end of 2007, concern over the state of the economy has progressed from malaise to real apprehension. In a recent Wall Street Journal op-ed piece, Harvard economist and former chair of the Council of Economics Advisors Martin Feldstein rated the chances for a recession as one in two, while former Fed Chairman Alan Greenspan stated that the prospects are clearly rising with economic growth getting close to stall speed. These appraisals were seconded by another noted economist, Lawrence Summers, the former secretary of the treasury and more recently president of Harvard University.
In 2007, the economy overcame the significant headwind of a declining housing sector, problems in the automobile industry, high energy prices and the spreading consequences of the subprime mortgage problems. Each time the economy appeared to be weakening, it would respond with signs of life. For example, third quarter growth was reported at a robust 4.9 percent and November retail sales were surprisingly strong. Several times in 2007, the stock market appeared to shrug off these concerns. The economy may, however, be running out of steam.
A hopeful outcome of the current situationthe so-called soft landing scenariowould be slow growth in the the first quarter of 2008 followed by a more vigorous expansion. A less positive outcome would be actual declines in the third quarter of 2007 and first quarter of 2008 (which would constitute a recession) followed by a recovery later in 2008.
Policy makers are taking the situation seriously with a number of plans being floated to stimulate the economy. This is in marked contrast to earlier in 2007 when there seemed to be more of a steady-as-you-go approach to the economy. In the first half of the year, the Fed stressed vigilance against inflation and avoiding the moral hazard problem of lowering interest rates to bail out the beleaguered financial sector. However, when the economy seemed to be slowing, the Fed overcame these reservations and aggressively cut interest rates the last part of the year. The ability to cut rates further, however, is limited by fears of inflation as evidenced by the November consumer price index, which registered a 4.3 percent increase over the same month in 2006.
There is a famous saying from World War II that: There are no atheists in foxholes. This suggests that intellectual beliefs often give way to more emotional ones in times of stress. Princeton economist and former member of the Federal Reserve Board of Governors and the Council of Economic Advisors Alan Blinder is credited with an economic corollary of this, which holds: There are no non-Keynesians in economic policymaking positions in times of stress. In other words, no matter how conservative economic policymakers seem to be in the abstract, they become activist and interventionist, for good or for ill, when facing an economic crisis. The most egregious example of this was when Richard Nixon imposed wage and price controls in 1991. At the time, he was considered a conservative.
In the past month, the Bush administration has come up with plans to freeze interest rates on some sub prime loans as well as a possible rescue plan for financial institutions with large numbers of problem loans. There are even calls now (by Reagan advisor Feldstein and in a Wall Street Journal editorial) for tax cuts to forestall a recession. This is surprising since most economists no longer believe in tax cuts as a way of fighting recessions.
If a recession is in store, it would likely be a relatively modest one. The last recession in 2001 saw little decrease in employment, and there was some controversy at the time as to whether the slowdown should actually have been labeled a recession. Most observers believe that the modern economy is better able to adjust to changing economic conditions than in the past. Firms make quick adjustments to changes that avoid more drastic consequences later on. In the past, for example, the large, unexpected accumulation of inventories was a factor in accentuating downturns. Today, firms are able to respond to unexpected sales declines quickly to bring production in line with sales.
It is too early to tell whether the economy is simply slowing or in actual decline. We do not know for sure if the anti-recession measures are necessary or even if they will be effective in countering a recession if one is on the way. If we are lucky, the end of 2007 and the beginning of 2008 will be looked back on as a period of slow growth in a period of long-term expansion. If things do not go well, this period may mark the end of the expansion and the beginning of a recession. In the long term, the difference in these two scenarios will probably be relatively minor.
- J. Fred Giertz is a professor of economics within the University of Illinois' Institute of Government and Public Affairs. He can be reached at (217) 244-4822 or firstname.lastname@example.org.
AMERICA'S EXPORT GROWTH SUBSTANTIAL
The one big wild card that could make a significant difference in the economic maelstrom of 2008 is exports.
Only a few years ago, the idea of exports playing a significant role in America's economic strength was considered impossible. The U.S. was swamped by imports and a shrinking product export base.
In fact, the nation's trade deficit grew ever larger, reaching the dangerous level of 6 percent of gross domestic product in 2003.
But this scene is changing dramatically.
Exports now look like a main driver of the American economy, trailing only Japan in revenue total.
It's expected that exports will comprise one-half of the U.S. gross domestic product increase next year, outdistancing imports for the first time since the early 1990s.
The trade gap is expected to shrink to 3.8 percent of gross domestic product in 2008, the smallest share of gross domestic product in this decade.
It will also be down substantially from this year's 5 percent.
America's global shipment growth, two-thirds of which is composed of industrial products, is facilitated by the weakest dollar in decades, coupled with soaring demand from the world's emerging nations. This includes high technology, aircraft and motorcycles, military equipment, heavy machinery and a variety of mill supplies.
An increase in such services as consultants, travel, advertising and legal advice have been in surplus territory during this decade.
Those who have written the obituary for America's industrial sector may be surprised to learn that exports have helped revive the moribund U.S. industrial sector, which had seemed lifeless due to a spate of outsourcing.
The industrial sector has now been further abetted by commercial and industrial construction, plus the beginnings of a major infrastructure of bridges, dams, airport and highway overhauls.
Latest statistics tell the story:
Exports to China are up 16 percent from the end of the third quarter last year.
U.S. exports to Brazil have increased nearly 30 percent, and to India an incredible 65 percent.
Leading U.S. companies such as Caterpillar, Boeing, Cisco and Timken Roller Bearings are building huge markets abroad due to the end use markets to which they cater.
The dollar/euro disparity has accelerated Boeing's revenues and decreased Airbus sales.
Together with the U.S. industrial sector's greater productivity, the smokestack industries are experiencing an unexpected revival.
Part of this surge, which has brought the manufacturing arena back to double digits of our gross domestic product, is due to the demand by U.S. end use industries that need commodities as well as specialized products quickly, and can't wait for overseas delivery.
Another recent factor that has abetted U.S. manufactured products is quality. It is unsettling to learn that an increasing number of imported products and components are not up to required standards, especially in such end use applications as power generation, oil refining, natural gas and the chemical industry.
In any case, expect the industrial sector, as well as exports, to become a major offset to the decline of residential housing and the automotive sector.
Editor's note: This article was previously published in the Desert Sun in Palm Springs, Calif.
- Morris R. Beschloss graduated from the University of Illinois' College of Communications in 1952.
He is a columnist for the Desert Sun and publishes two newsletters for the pipe, valve and fittings industry. He can be reached at email@example.com or (760) 324-8166.