Sun, Jan 01, 2006 - Page 11 News List

US economists look past trouble signs

THE YEAR AHEAD Despite some worrisome indicators, most market watchers do not expect the growth rate to drop much below the 3.7 percent average of last year


The housing market is gradually fading as a prop for the US economy, eroding a source of wealth that allowed consumers to borrow and spend avidly in recent years.

Meanwhile, the bond market, where short-term interest rates are now slightly above long-term rates in what is known as an inverted yield curve, suggests that the economy is headed for a sharp slowdown, perhaps even a recession. The stock market rally earlier this year has petered out.

So why do most forecasters predict that economic growth will remain relatively strong this year? Perhaps because they are counting on other sectors that have been relatively weak -- particularly stepped-up business investment -- to help sustain the robust expansion of the last 30 months.

"I think the surprise will be that housing prices and housing sales will decelerate, but the economy will do just fine," said Richard Berner, chief domestic economist for Morgan Stanley.

Berner is not alone in his optimism. Despite some worrisome indicators, only a handful of the 53 economists surveyed by Blue Chip Economic Indicators predict that the growth rate this year will drop much below the 3.7 percent average of last year.

That outlook also assumes that consumer spending, deprived of the lift from rising home prices and mortgage refinancing, will not drop very much. Despite high debt levels, it is still safe to say that Americans will somehow continue to buy on credit, and with energy prices falling, wages now diverted to gasoline purchases should be freed up to spend on the array of goods and services that drives the economy.

"One of the big stories today is that people are so happy with US$2 gas," said Richard Curtin, director of the Surveys of Consumers at the University of Michigan, explaining a big jump in consumer confidence this month.

"There is nothing better than a relative price decrease," he said.

Forecasters are notorious for missing major turning points in the economy. Still, as home construction and home sales subside, and consumer spending eases off, most experts see a different powerhouse kicking in to keep the economy on its upward path. The prime candidate is capital investment -- the spending by business on all the equipment and facilities needed for production.

Business contributed powerfully to the boom of the late 1990s by investing generously in high-tech machinery and computers, but then cut back sharply in the dot-com bust, helping to weaken the economy. Now an upturn in this spending in the spring and summer months has raised expectations that corporate America has finally begun to replace aging and outdated equipment, drawing on record profits to do so.

"Business has tonnes and tonnes of capability to spend," said James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. "The longer the recovery keeps going and stock prices go up, the more and more confident business is going to become and the more it will spend on its operations."

The anecdotal evidence is mixed on this score. Verizon, for example, invested US$15 billion this year to expand its wireless system and start building a fiber optic network that will allow it to compete more directly with cable television providers. The same hefty sum is to be spent in the year ahead. But that is not enough. For the economy as a whole, matching last year's outlay, no matter how hefty, adds nothing to economic growth.

This story has been viewed 4096 times.

Comments will be moderated. Remarks containing abusive and obscene language, personal attacks of any kind or promotion will be removed and the user banned.

TOP top