Economic Recovery Becoming a Fact By Andrew L. Jaffee, October 16, 2003	Home   Search   Forum   Terms

Evidence of an improving U.S. economy is becoming indisputable. Whether it be commentary from the Federal Reserve talking about the economy gaining speed, evidence of increasing strength in the job market, or cold, hard numbers from the Commerce Department, proof of an economic pick-up is reality. It is even possible that many people are underestimating U.S. economic strength.

According to the Commerce Department, the U.S. economy as a whole grew at an annual rate of 3.3 percent in the second quarter of 2003, as measured by the Gross Domestic Product (GDP). This compares to GDP growth of 1.4 percent in the first quarter. Personal spending by consumers grew 3.8 percent in the second quarter, compared with 2.0 percent in the first. Investment in nonresidential real estate grew 7.3 percent, as compared to a first-quarter drop of 4.4 percent. Investment by U.S. companies in software and equipment increased 8.3 percent, in contrast to a first-quarter decrease of 4.8 percent. Manufacturing activity, as measured by the Institute for Supply Management Manufacturing Index, has risen for the past four consecutive months. American workers’ productivity – a measure of how much service or product U.S. workers produce in an hour – grew an amazing 6.8 percent in the second quarter versus 2.1 percent growth in the first quarter. Corporate profits rose $80.6 billion in the second quarter, compared with a $20.4 billion rise in the first.

These numbers have fueled U.S. stock markets. The broad market averages, like the tech-heavy NASDAQ, has risen 41.78% year-to-date, with the Dow Jones rising 15.03% and the S&P 500 growing 17.58%. These numbers are good for both companies and individual Americans.

Profit growth and rising stock prices makes companies more willing to hire new employees and purchase new equipment. Since forty-seven percent of Americans are invested in stocks, rising prices means greater personal net worth, a feeling a security, and leads to increased spending. This in turn leads to higher revenues and profits at companies, which leads to increased spending and hiring. This cycle is good for the economy and nation as a whole.

There are several factors that may pose a threat to continued economic improvement, namely the current lack of sustained job growth, the increasing export of American jobs overseas, the sluggishness in technology spending, and increasing productivity growth.

One may wonder why increased productivity could have a downside. As productivity increases, companies get more product and/or services out of fewer workers. Only when demand outstrips the capacity of a company’s workforce will that company start to hire again.

One may also wonder why companies would be hesitant to hire new workers despite the good economic numbers. The answer lies mainly in psychology. During the booming 90’s, investors and the companies they were invested in got a little too excited. Many were talking about a “new economy” that would defy the laws of gravity and achieve “escape velocity.”

Investors bought too many stocks of companies with questionable business plans. They also bought too much equity in good stocks. Many companies, both questionable and serious, spent too much – especially on technology. The end result was a glut of services and manufacturing capacity for a reality that didn’t turn out to be as hopeful as predicted. Many investors lost a lot of money. Many companies ended up with too much hope and too little demand to satisfy those hopes. The end result was an overhang of sentiments like, “I’ll never buy stocks again.” Some company executives are waiting to be absolutely certain that, “This time the recovery is for real,” even though such certainties are rarely attainable.

Economies are no different than natural ecosystems. They go through cycles. People tend to swing between the extremes of fear and greed. When economies reach extremes, both good and bad, they tend to need some time to regroup and recover. Yet the economic news of the last six months is very hopeful.

While people still have valid worries about the job market, unemployment tends to be a lagging economic indicator. Job creation should pick up once companies and consumers feel better about the economic climate. In a positive sign, new claims for unemployment insurance have started to drop recently. Today's report showing initial jobless claims dropping by 4,000 to 384,000 is more evidence that the job market is firming. IBM, the world's largest supplier of computer services and hardware, announced last night that it intended to hire 10,000 new workers.

Good economic times are here; more are ahead.