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The latest in a string of upbeat news reports revealed that we experienced the first surge in manufacturing in eighteen months. Economists are bundling this in with the other good news and are now scrambling to increase their forecasts for real gross domestic product (GDP) growth in 2002. At the beginning of the year, in a special Wall Street Journal report, top economists weighed in with an average forecast of 2.59% growth for 2002. That number will now be revised upwards to approach the 4% range. In the report, two of the top-five real-GDP forecasts were made by well-known supply siders. Since probably less than 10% of the economists contributing to the Journal forecast were of the supply-side persuasion, their representation in the top group is remarkable. People who focus less on disposable income and pay a bit more attention to the substitution effects were the ones who had the foresight to call for a higher real-GDP growth rate. Being of the supply-side
orientation as well, I also had what people considered an optimistic Historically, positive shocks will temporarily lead to a higher or above-average growth rates and negative shocks will temporarily slow down the economy. But more often than not, the economy's growth rate hovers around 4%. The major deviations from the 4% trend are associated with major policy shocks, such as the phase in of the Reagan tax-rate cuts, the Bush/Clinton tax-rate increases, and Y2K.
Practically speaking, what will the 4% number mean to the investor? First, as we return to normalcy, so will the all-important earnings per share. But obviously, as earnings are restated as a result of Enronitis, this area may take a bit longer to hit "normal" than GDP. While the economic recovery will be strong, it will take a while for the market gains to accelerate to the rate of gains that people had grown accustomed to in the latter part of the 1990s. But during the early part of the recovery, earnings growth will accelerate, and the market will favor the growth companies. Since nothing in the Bush economic package is truly permanent, smaller-cap stocks will benefit from the regulatory effect of transitory and yearly changing regulations. And on the bond front, as the recovery becomes evident, the vigilantes will indeed punish the longer-term bonds. However, with no inflationary spike apparent, the bond-market hit will represent a buying opportunity. So set your market-warning systems to condition normal. Life at 4% is the way it should be.
— Victor
A. Canto and Peter Mork of La Jolla Economics |
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economic data suggests that the U.S.economy is steering out of recession,
and it seems
