May 4, 2003
A Noted Few Make a Case for Optimism (Again)
By DAVID LEONHARDT
CONOMIC optimism has been a bad bet for more than two years now, but it has not suffered from any shortage of takers.
Starting in early 2001, Federal Reserve officials and most Wall Street economists began predicting a quick return to healthy growth, only to repeat the forecast a few months later after they were proved wrong. The Bush administration, which took office offering a presciently sober view, quickly turned to cheerleading reminiscent of the Clinton administration's final months.
So anybody with a good memory deserved sympathy last week when trying to understand Alan Greenspan's hopeful testimony to Congress. Sure, Mr. Greenspan, the Fed chairman, said the end of the main fighting in Iraq would probably allow the economy to finally escape its slump. But we heard the same theory about Sept. 11, the stock market bubble and corporate scandals. What makes the present the true watershed?
A handful of economists have an answer to the question, and they deserve consideration for a simple reason: They've been right before. While most forecasters pooh-poohed the likelihood of recession in 2001, this group predicted one. Now some of them say that the same signals that were flashing red two years ago have turned green.
Their case starts with government policy. The government's effort to revive the economy began in early 2001, when the Fed began cutting its benchmark short-term interest rate. President Bush signed a tax cut that spring.
But only in the last year has the stimulus from these policies fully kicked in. "We just now should start to see the benefits," said James W. Paulsen, the chief investment strategist at Wells Capital Management in Minneapolis and one of the recession spotters of 2001.
The federal government did not begin running an annual deficit — putting more money into the economy than it was taking out — until April 2002, Mr. Paulsen said. Today, tax cuts and benefits like unemployment insurance are giving money to households, while military and security spending is helping some businesses.
Long-term interest rates, which are influenced by the Fed's actions but set by investors, are near a 40-year low, making both mortgages and business loans less expensive. From late 2001 to March 2002, when a rapid economic recovery seemed possible, these rates rose more than 15 percent.
The value of the dollar also did not begin its main descent until the spring of 2002. Only since then has the effective price of American goods become more competitive with those of their rivals. And oil prices have tumbled since the eve of the Iraq war.
Today, Mr. Paulsen said, all the economic cannons that can ignite growth are firing.
For the first time since the 20th century, companies are also showing signs of health, if not yet vigor. Profits in the first quarter continued a climb that began more than a year ago. So far, the improvement has largely come from layoffs and other cost cutting. But eventually, the optimists say, better profits will cause companies to invest in new equipment, technology and workers.
Orders for new equipment by technology companies are exceeding shipments for the first time since 2000, suggesting that corporate investment could be near a turning point, said Robert J. Barbera, the chief economist of ITG/Hoenig.
"If what was going down hard is going up and the war is behind us, that's enough to be optimistic," Mr. Barbera, one of the new optimists, said.
THE argument is not without its weak spots. Even Mr. Paulsen said he thought that the growth spurt would last just a few years before budget deficits, an aging population, the low savings rate and global overcapacity caused new problems.
Other economists note that companies are using only about three-quarters of their production capacity, despite their recent cuts. So they still have room to expand without making new investments that would create jobs. If the job market remains weak, consumer spending could grow at an even slower rate, leaving executives unwilling to expand and keeping the economy caught in a slow-growth cycle.
"We do not see a healthy recovery," said Lakshman R. Achuthan, the managing director of the Economic Cycle Research Institute in Manhattan, which also foresaw the 2001 recession. "We just don't see business investment returning anytime soon."
Skeptics like Mr. Achuthan certainly look better right now, two days after the Labor Department announced that the economy lost 525,000 jobs in the last three months. But no one should dismiss those optimists who have not been making the same prediction for almost three years.
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