Mon, Jul 28, 2003 page12

• Economy picks up steam

  LONG-TERM TORPOR After two-and-a-half years of wallowing in the economic doldrums, the US economy is showing signs of strength -- but can it be sustained?

  • AFP
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  Is the world's largest economy set to break out of its torpor of the past two-and-a-half years, or is it another false start leading to disappointment?

  Recent data over the past week showed signs of surprising strength in manufacturing, a red-hot housing sector and some improvement in employment, confirming some predictions of a second-half acceleration.

  Economists say it is difficult to define turning points, but that evidence is growing.

  "As usual, at cyclical turning points, hard evidence of stronger economic growth remains scattered and fragmentary," said Kermit Schoenholtz, an economist at Smith Barney,

  "Nonetheless, a US-led cyclical pickup is coming into view, with business confidence generally on the rise," he noted, saying that tax cuts and low interst rates may fuel a spending boom.

  "Consumers appear to have shaken off early-spring jitters, buoyed by rising net worth, easing debt service, lower inflation, and tax cuts. Businesses have remained more reluctant to expand, but recent surveys show rising orders and confidence."

  On Friday, the government said orders for durable goods from US factories took a five-month record jump of 2.1 percent in last month to US$172.5 billion, boosted by a 20-percent leap in orders for civilian aircraft.

  "It really is beginning to look as if the train has finally left the station," said Naroff Economic Advisors president Joel Naroff, noting that the durable goods report bodes well for the struggling manufacturing sector.

  New home sales surged 4.7 percent from May to a record annual rate of 1.16 million last month and were up 21.0 percent from last year.

  Existing home sales fell 0.3 percent to 5.83 million in the same month but the pace remained strong.

  The figures were the latest in a string of bullish economic reports, which had been stubbornly slow since the end of the Iraq war, a conflict which shocked many businesses into near-paralysis.

  But not all experts are convinced the long-awaited recovery is here.

  Richmond Federal Reserve president J. Alfred Broaddus said in a speech Friday he sees a "mixed picture" in the economy.

  "To sum up on the current state of the economy, there are a few signs in the recently released data that the recovery may be gaining strength," he said.

  "But in my view there is not much hard evidence that this is happening yet -- certainly no compelling evidence of the pronounced post-Iraq-war boost to activity that many people, myself included, had anticipated."

  Broaddus said recent signs of a pickup in consumer confidence and factory output were offset by the recent rise in the unemployment rate.

  He said an improvement in the labor market is key to economic recovery and that more data are needed before there could be confidence of a firming in the job market.

  Some economists worry the recent spike in interest rates -- with bond yields up about 1 percentage point in the past month -- may dent confidence, hurt the housing market and crimp an economic recovery.

  "The current rout in the US bond market is starting to reach epic proportions," said Morgan Stanley chief economist Stephen Roach.

  "Needless to say, if the rout continues, the spill-over effects on other asset markets could be wrenching, as would be the negative impacts on any recovery in the US economy."

  Although interest rates remain low by historical standards, that has fueled borrowing and spending that has kept the economy afloat, and Roach says an uptick in rates could be problematic.

  "A sharp additional back-up in long [interest] rates poses a serious threat to a nascent recovery in the US economy -- not only crimping the credit-sensitive sectors of homebuilding, capital spending, and consumer durables, but also aborting the home mortgage refinancing cycle that has been so supportive of consumer demand," Roach said.

  "We tend to forget that the US economy is still closer to the brink of deflation than inflation," he said.
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