The economic recoveries under way in the US, Europe and Japan will be strong enough to overcome damage to consumer and investor confidence from falling stocks and corporate accounting irregularities, many economists say.
The pace of expansion in Europe is picking up, US first-quarter growth was the fastest in two years and Japan grew for the first time in 20 months. At the same time, US stocks had their biggest first-half loss since the 1970s in the wake of the WorldCom Inc and Enron Corp. accounting scandals. US and European companies lost a combined US$2.5 trillion of market value.
"This makes little sense, and it will not continue," said Charles Lieberman, investment strategist and chief economist at Advisors Financial Center in Suffern, New York. "As the economic recovery takes hold, sentiment will improve."
Recent data show signs the US economy is recovering from a recession that began in March 2001. Sales of new and existing homes are at record levels, Ford Motor Co. and General Motors Corp have been boosting production to keep up with demand for cars and trucks, and manufacturing has expanded for five straight months.
After slowing in May, retail sales are expected to rebound in June, economists say. Wal-Mart Stores Inc., the world's largest retailer, said same-store sales are near the top of its forecast for the month. Wal-Mart had forecast an increase of between 5 percent and 7 percent.
More important, from the Fed's standpoint, is that business investment on new plants and equipment is increasing. Capital equipment orders have risen for the past two months. The semiconductor book-to-bill ratio, which measures demand for computer chips, rose for a third month in May.
"I think we've seen the worst, and we're definitely in a recovery mode," said Paul Folino, chief executive officer of Emulex Corp. The data-storage equipment company's customers include International Business Machines Corp.
The Commerce Department reported Thursday that corporate profits from current production, a gauge that economists follow, rose 5.8 percent in the first quarter, suggesting business is improving and will continue to do so.
"Profits are being supported by strong productivity gains, consequently muted unit labor costs and growing output, all of which ought to persist in coming quarters," said Joshua Shapiro, chief US economist at Maria Fiorini Ramirez in New York.
In leaving the benchmark US interest rate unchanged at 1.75 percent last week, Federal Reserve policy makers said that "economic activity is continuing to increase," although "the degree of strengthening remains uncertain."
The Bank of Japan recently upgraded its economic assessment for a fourth straight month, saying rising exports and industrial production may boost company profits and domestic demand.
The Japanese economy expanded at a 5.7 percent annual rate in the first quarter. Exports climbed 5.7 percent in May from April, the biggest gain since January.
"The economy shows signs of stabilizing, though domestic demand, such as business investment, remains weak," central bank Governor Masaru Hayami said.
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