March 26, 2004, 8:19 a.m.
Expansionist Mentality
The global economy is strong. Don’t sweat the bumps.

Near-term uncertainties have weighed on stocks in the first part of 2004, but this is no reflection on the global expansion — which remains very strong. Despite the equity correction, we’re still in the early stages of a durable, multi-year, mildly inflationary expansion that will push stock prices, commodities, bond yields, and U.S. employment to higher levels.

In particular, the view that the U.S. has too little job growth to be considered a strong economy is utterly wrong. Job growth in the Labor Department’s establishment (or payroll) survey bubbled in the late 1990s due to double-counting caused by rapid turnover, the stock market bubble putting a premium on payroll jobs, and multiple jobs for many individuals. This is reverting to normal. Today’s 5.6 percent unemployment rate is low by historical standards and is consistent with fast economic growth and rising profits.

The current focus of the stock market correction is terrorism and high energy prices (spurred in large part by dollar weakness and U.S. government oil purchases to fill the Strategic Petroleum Reserve. For more, see Fred Leuffer’s article on NRO.) U.S. corporations aren’t helping matters by remaining stubbornly risk-averse — meaning they have a preference for cash and consultants rather than inventory and employees. (This is a leftover mentality from the strong-dollar deflation and equity crash of 2001.)

Also weighing on stocks is the knowledge that a John Kerry administration would let the critical 2003 Bush cuts on the taxation of capital expire on December 31, 2008. Investors know that doing so would cause an increase in the cost of equity capital and a corresponding reduction in the value of stocks.

Other problems facing stocks include deep uncertainty about inflation, super-low U.S. interest rates, and the impact of the coming rate hikes. The Federal Reserve is as stimulative now as it was deflationary in 2000 — and its stimulus is being amplified by central banks in Japan, China, and elsewhere.

Yet, despite all this, the economic moment insists on optimism. Profits, for one, are strong at home: Annualized U.S. corporate earnings in the fourth quarter were $1.2 trillion, up 29 percent year-over-year, and full-year 2003 corporate earnings were $1.1 trillion, 18 percent above 2002, the previous record. Added to this, there’s a sound connection between corporate dollar profits and global nominal dollar GDP — meaning that the drags and economic uncertainties we’re all watching will be overwhelmed by the strength of the global expansion.

— David Malpass is the chief global economist for Bear Stearns.

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