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Accentuate The Positive
The economy is doing better than the bears let on.


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David Malpass

The bears are still out in force — worrying about the consumer and the trade deficit — but there have been sharp improvements in the economic picture at home and around the globe.

The causes of the global recession and domestic downturn are very clear: the ever-strengthening dollar and deflation; very high real interest rates; OPEC-controlled oil prices; and a record tax burden that drained a net $236 billion (2.4% of GDP) from the U.S. private sector in 2000 in the form of the fiscal surplus.

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But none of these contractionary forces are present now. In particular, while oil prices are still very high at $28, they are falling fast and they no longer appear to be OPEC-controlled. Meanwhile, real interest rates are negative for the first time since 1992.

Much of the pessimism today is backward looking, comparing the economy’s current conditions with the bubble years and reaching a grim conclusion. Yes, the 3.8% unemployment rate of April 2000 is not on the radar screen (it’s 5.8% now). Nor are repeated quarters above 6% growth (as we enjoyed in the 1997-99 period); a Nasdaq at 5000 (as it was in March 2000); nor the dollar price of a euro at $0.82 (as it was in October 2000). That was then.

But there is a sturdy platform for economic growth. The dollar is at a pro-growth level. Interest rates are low, as are inventories. The level of employment is high by historical standards, and is sufficient to allow continued growth in consumer spending. And corporate profits are rising.

We all keep hearing the negatives, but things are not so bad on closer analysis.

Recent data show 108,000 jobs lost in March. Yes, but the current level of U.S. employment is over a million and a half higher than the 1999 average. In the financial sector, employment hit a record 3.88 million in March, up 100,000 from 3.78 million at the beginning of the recession in March 2001.

Consumer debt has reached record levels at $8.7 trillion. Yes, but personal income hit a new record in February at $9.1 trillion, arguing for consumer resilience, and consumer assets are holding at $48 trillion.

The U.S. current account deficit, at 4.8% of GDP, is in record territory. Yes, but U.S. economic growth is well above our trading partners and investment coming into the U.S. dwarfs investment into other countries.

The U.S. fiscal deficit may top $300 billion in fiscal year 2003 ending in September. Yes, but at 2.7% of GDP, this is well below the 1983 peak of 6% of GDP. And the debt-to-GDP ratio is 35.5%, well below the 49.5% recorded in 1993. Given low interest rates, the cost of servicing the U.S. government’s debt is also steady relative to the budget and GDP.

Today’s economic outlook is modest by historical standards, yet it is well above the prevailing pessimism. Americans can expect a gradual increase in the U.S. growth rate from 2.9% (year-over-year) in the fourth quarter of 2002 to 4% in the second half of 2003. There will be job growth late in 2003, pushing U.S. employment up to a new record in 2004. Corporate earnings will rise well above the U.S. nominal growth rate (though nowhere close to the bubble years). And with real short-term interest rates deeply negative, it’s arguable that the next Federal Reserve rate changes will be increases, not cuts — a positive sign for our economic direction.

It’s time to set bearish worries aside, and focus on today’s more positive — and appropriate — economic themes: The U.S. economy is not fragile. Iraq remains the key variable in the repricing of the markets and the economic outlook. The dollar is at a level that stops deflation and starts a reflation. And growth-accelerating tax-cuts are moving to center stage in Washington.

On this last point, there’s no risk of there being too much stimulus today. The president’s growth package offers the country the economic insurance it needs.

— Mr. Malpass is the Chief Global Economist for Bear Stearns.



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