Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Trend Setters and Range Riders -- Ignore unavailable to you. Want to Upgrade?

To: 2MAR$ who wrote (3379)	3/24/2001 7:38:01 PM
From: kendall harmon	Respond to of 5732

Only the mighty consumer can rescue us now, Irwin Stelzer from tomorrow's (London) times {CONSIDER an economy with these characteristics. The unemployment rate is at a historic low; inflation is nil; interest rates are coming down, as are taxes; the Treasury is rolling in surplus funds; the currency is strong; productivity is rising; the Dow is considerably higher than it was on December 5, 1996, when Alan Greenspan, Federal Reserve chairman, famously warned of "irrational exuberance"; and the nation has been blessed with a new communications infrastructure. That is a thumbnail description of the American economy. Yet gloom pervades boardrooms and cocktail parties in New York, Washington and some of the leading money centres - and not without reason. The manufacturing sector is troubled, inventories are too high, the trade deficit is at record levels, trillions of dollars have been wiped off the balance sheets of American households as the Dow seems unable to find a bottom and the share prices of 500 of Nasdaq's high flyers have slumped 90%, and the president is predicting economic doom if his too-little and too-late tax cut is not passed. Into the battle between prosperity and recession come three warriors: Greenspan, the mighty American consumer and what the former prime minister Harold Macmillan most feared - "events, dear boy, events". Greenspan remains convinced that the productivity gains of recent years are a structural rather than a cyclical phenomenon, and that the advantages accruing from the investment boom in communications infrastructure will roll on for some years. After all, when the financial bubble created by the construction of America's railroads burst, the nation was left with the track and rolling stock that drove down transport costs for decades after the last railroad share certificate had been converted to wallpaper. So with inflation tame and the economy slowing, the Fed chairman has cut interest rates. Investors had hoped for more than the half-point cut announced last week, but Greenspan felt that the three-month, 1.5-point easing that has brought rates to their lowest level in almost two years will do, at least until the economic picture becomes clearer. More would have encouraged investors to believe that he would always support share prices with rate cuts. But Greenspan matters a lot less now than the American consumer, who drives about two-thirds of the economy. For years Americans have spent freely and saved somewhere between very little and nothing at all, counting on share prices and house values to increase their wealth. Gavyn Davies, chief international economist at Goldman Sachs, estimates that Americans have been spending between $3 and $4 out of every $100 increase in the value of their portfolios, and that this has added 1.5 percentage points to economic growth. If consumers react to the decline in share prices in the same way they reacted to the rise, they will begin to save more to offset losses on their shares. This would increase the probability of at least a year-long recession. Davies says he sees no signs in the data of any such development - yet. In short, the signs are so mixed that all one can do is hope that the chief executive of Wal-Mart, the world's largest retailer, was doing more than trying to reassure shareholders when he said: "We do not see any indication that spending will slow further from its current levels." This brings us to "events". If the economy is indeed teetering between recession and resumed growth, even Greenspan's interest-rate cuts and a calm American consumer might not be enough to offset the effects of two shocks. First, Opec has decided to cut production to raise oil prices and to prevent consuming countries from building up inventories to meet the summer driving peak and next winter's heating season. If the cutbacks raise prices by the $2 a barrel that the cartel seeks, American consumers will ship another $8 billion a year to the Arab sheikhs and countries such as Mexico. This means that the "tax increase" Opec is imposing on Americans is some $2 billion more than than the tax cut President George Bush has in mind for this year. Add to this the electricity crisis in California, the world's sixth- largest economy. Because environmentalists and assorted Nimbys (not in my back yard) have prevented the construction of any new power plants in the past decade, demand for electricity far exceeds supply. And because California has a weird regulatory system that allows wholesale prices to rise in response to demand, but freezes retail prices, the state's utilities have virtually bankrupted themselves buying dear and selling cheap. Rolling "brownouts" are already being imposed and will turn into serious blackouts when summer comes and Californians switch on their air conditioners. That disruption to the state's economy will be magnified by the impending strike of writers and actors that will shut down Hollywood's film and television industry. In short, Californians are in for a long hot summer. Worse still, industry insiders tell me there may be "other Californias", most notably in New York City. All of this will test the new administration's resolve to let the states, rather than the federal government, handle such problems. It should be clear by now that economists' crystal balls are more than usually cloudy these days. The long-term outlook for America's economy remains bright. But it will be the unpredictable American consumer and "events" that will determine how this year and the next play out. } sunday-times.co.uk