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 ecent
economic data suggests that the U.S.economy is steering out of recession,
and it seems
that most of the surprises regarding the pace of economic activity
have been on the positive side.
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
forecast. I expected inflation to decrease to 1.6% and the real-GDP
growth rate to rise to the
4% range in 2002. While it's nice to be right, this forecast was
within the normal range.
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.
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