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December
20, 2002, 12:00 p.m.
Piecing
It Together
We’re
pointed toward an economic expansion.
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 he
U.S. is now moving past the "piece-by-piece" recovery of 2002, which was
the logical aftermath of the 1997-2001 deflation. Terrorism, Iraq, and
oil prices remain key variables in the new year ahead. Yet assuming progress
on these, the next economic phase should be a more normal expansion focused
on earnings and business investment.
Looking
back over the year, the U.S. did not come that close to a double-dip recession,
a second deflation, a consumer rollover, a housing crash, a problem financing
the current account deficit, or a dollar crisis. Some of those worries
were incorrectly priced into financial markets in September, and the October-November
equity rebound points toward an economic expansion.
Underlying economic
strengths include job growth in the small-business sector, solid personal-income
growth, adequate consumer balance sheets, low inventories, widening profit
margins, and growing corporate profits. Still, there are concerns: Terrorism,
weak global investment in 2002, added friction in the U.S. (security costs,
regulatory burdens, litigation, etc.), and economic weakness abroad will
cause flatter global growth than in the 1990s.
Many eyes, of course,
are on George W. Bush and his new economic team. A key variable in the
impact of the team will be the Treasury secretary's ability to straighten
out policies and messages on international matters. This includes the
dollar, the IMF, and Latin America. There's little reason to expect a
weak dollar policy, and the dollar should strengthen against the yen and
euro in 2003, with the pace depending on progress in Iraq and U.S. economic
strength.
China's dollar link
should continue, meanwhile, creating another strong argument against competitive
devaluation of the dollar. The current thrust of the International Monetary
Fund is a bankruptcy or default process for emerging markets, which has
been perceived very negatively by financial markets. The IMF should be
fundamentally reformed to make it less powerful, more growth-oriented,
and less harmful to developing countries.
In 2003 and beyond,
U.S. fiscal policy will now be as important as monetary policy. The new
economic team can be expected to deliver a moderate tax-cut bill (a bit
for everyone) aimed at winning enough Democratic support to get the bill
through the Senate. A key variable in the tax-and-spend debate is dynamic
scoring: Will the Republican Congress now allow the economic effects
of fiscal policies — currently excluded in the legislative process
— to be considered?
You can add that
to the list of economic growth variables for the new year. But you can
also be relatively confident that the pieces for a normal economic expansion
are now in place.
—
Mr. Malpass is the Chief International Economist for Bear Stearns.
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