Economic developments over the year-end point to a strong global expansion in 2004, reaffirming that the U.S. economy is still being underestimated. New data show fast — not moderate — growth, a broadening of the economic expansion, and strength in small businesses and prices.
To begin, there was rapid growth in industrial production as 2003 came to a close. The Institute for Supply Management’s January 2 index for December manufacturing rose to 66.2 — the strongest reading since 1983. And the ISM’s sub-index for new manufacturing orders hit 77.6 — the highest level since August 1950.
On the jobs front, initial unemployment claims fell to 339,000 in the week ended December 27. The four-week moving average fell to 356,000, the lowest mark since February 2001. Initial unemployment claims are now running only 0.25 percent of total unemployment, a rate consistent with past periods of very fast employment growth. Of course, naysayers are out suggesting that fast productivity growth is an impediment to employment growth. They’re wrong. Employment growth is already fast, as shown in the Labor Department’s household survey, while the government’s establishment survey has routinely been revised upward toward the household survey in past economic upturns.
November readings on durable goods orders, new home sales, and existing home sales showed small retreats from the very high levels of previous months. But there’s no cause for concern here. A November headline for sales of existing single-family homes read: “November home sales decline to 6.06 million from 6.35 million in October.” But a 6 million annual rate is still very fast historically.
Inventories, meanwhile, are still at a record low ratio to sales. Revised data show that inventories declined amid the 8.2 percent growth of gross domestic product in the third quarter, leaving substantial upside potential for the already fast-growing economy.
Businesses will want to build inventories and borrow more at the first sign of a hike in interest rates — which should rise sooner and more than current market expectations. The fed funds rate is as incorrectly low and distortive now (1 percent) as it was incorrectly high and distortive (6.5 percent) in January 2001 — pointing to substantial risks and uncertainties for 2004 monetary policy. However, rather than a brake, Fed rate hikes will likely be an accelerant for the real economy this year, making the Fed’s timing a key positive variable.
Those who continue to focus on “idle capacity,” joblessness, a consumer and housing crash, record trade and fiscal deficits, the end of tax rebates, and the government’s measure of personal savings have got it all wrong. The U.S. economic expansion will continue its healthy evolution toward investment and inventory rebuilding.
– David Malpass is the Chief Global Economist for Bear Stearns.