Cycling to 2004
By Robert J. Samuelson
washingtonpost.com
Thursday, November 20, 2003; Page A41
The U.S. economy seems to have just voted for George Bush. Almost all recent indicators favor the president's reelection: economic growth, rising at a 7.2 percent annual rate in the third quarter; jobs, increasing 286,000 since August; productivity, advancing at roughly a 5 percent rate since late 2001. Nariman Behravesh, chief economist for the forecasting firm Global Insight, has one of those equations that predict election results based on the economy and various political factors (incumbency, party affiliation). By the latest reports, Bush wins 56.6 percent of the 2004 vote.
Behravesh admits that these equations aren't infallible and that even if the economy stays strong, other factors -- Iraq, terrorism -- could doom Bush. But the business cycle is moving in his direction. It's psychology as much as numbers. Behravesh talks regularly with corporate executives who, until recently, "had retreated into their shells. They stopped capital spending. They stopped hiring. They became extremely risk-averse. Now, they're coming out of their shells." Capital spending (aka business investment) and hiring have both revived. In the third quarter, business equipment and software spending rose at a 15 percent annual rate.
Government policy and the enormous resilience of the U.S. economy explain the turnaround. Critics can gripe about Bush's big budget deficits and tax cuts, but they've obviously juiced the economy. The tax cuts alone provided $61 billion in fiscal 2003 and will add another $149 billion in fiscal 2004, estimates the congressional Joint Committee on Taxation. Next year's tax refunds are expected to rise 27 percent, says USA Today. (Cynics may suspect Bush of trying to buy the election.) Similarly, the Federal Reserve's low interest rate policy encouraged massive mortgage refinancings -- boosting consumers' purchasing power -- and aided the economy in countless ways.
Consider car dealers. They borrow to buy vehicles from manufacturers. Typically, interest costs amount to $70 to $120 a car, says economist Paul Taylor of the National Automobile Dealers Association. In 2003 these costs are $11; last year they were less.
But this business cycle has also followed its own peculiar logic, deeply rooted in popular psychology and the nature of American capitalism -- which often seemed at war with each other.
On the one hand, stubborn public optimism kept the economy from collapsing. Generally, Americans refused to submit to gloom even though gloom was amply justified by the stock market bubble, Sept. 11, rising unemployment and corporate scandals. But when mortgage rates dropped, millions of families bought homes. When automakers offered tempting "incentives," millions bought new vehicles. Sales of 17.1 million in 2001 were the industry's second-best year (after 2000). The fourth- and fifth-best years were 2002 (16.8 million units) and 2003 (16.3 million, estimated).
Since World War II, weak consumer spending has typically worsened recessions. Here, consumers were the economy's prop. Gene Sperling, a top economic adviser to President Clinton, argues that the 1990s boom left a strong underlying optimism that to some extent defied the onslaught of bad news. If so, Bush -- ironically -- may be the chief beneficiary.
By contrast, corporate America retrenched relentlessly. Once the boom imploded, companies discovered they had too much debt and too much capacity. Price competition in industries with surplus capacity -- car manufacturers, retailers and telecommunications firms, among others -- further squeezed profits. Driven to restore profits, companies closed factories, warehouses and offices. The weakest firms vanished. Layoffs spread.
The explosion in productivity -- meaning that fewer people accomplish the same or more work -- is commonly said to reflect the triumph of new technologies. This has surely occurred. The 5 percent productivity gains are double the increases of the late 1990s and triple those of the 1970s and '80s. But what may really account for this surge is a Darwinian process of elimination, as efficient firms displaced the less efficient. From 1999 to 2002, Wal-Mart expanded from 3,993 to 4,694 locations, says Stores magazine; meanwhile, Sears cut back from 2,960 to 2,192 and Kmart (in bankruptcy) from 2,172 to 1,831.
This business cycle pitted the irrational optimism of the U.S. consumer against the rational ruthlessness of the U.S. corporation. Would companies stop firing before consumers stopped buying, or vice versa? The good news -- for most Americans and probably Bush -- is that the issue seems to have been settled. Corporate Darwinism is subsiding, because it's succeeding. Costs have dropped. Sales have concentrated at stronger firms. In 2003, pretax corporate profits will rise about 22 percent from 2002, to $957 billion, estimates Nigel Gault of Global Insight. It will be the first time that 1997's record profits ($834 billion, pretax) have been exceeded.
What we have is a cyclical recovery. The same thing is occurring in Europe and Japan. Of course, long-term problems remain: American consumers are heavily indebted; the big U.S. budget and current account deficits will someday have to be curbed; the mortgage refinancing boom is ebbing; worldwide surplus capacity is still widespread; and China represents a huge unknown. Any of these problems might undermine economic and -- Bush's greatest vulnerability -- job growth. Could the recovery falter in a few months or, possibly, just after next year's election? Well, yes.
But for now, economists are raising their forecasts for 2004, and assuming they're right, the politics are plain. Democrats' economic criticisms will resonate less, and Bush's bragging will resonate more. At the White House, they may not be dancing over the economic news, but they must be smiling. Unlike his father, Bush may have beaten the business cycle.
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