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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (39484)	7/30/2001 10:48:36 PM
From: stockman_scott	Read Replies (1) \| Respond to of 65232

Economy Feels Good, Looks Terrible Monday July 30 Forbes.com By Dan Ackman Some reports call the nation's economy, with its 0.7% annualized growth rate, the weakest in eight years. One could just as accurately call it the strongest ever. The reason: The economy is still growing, however slowly, and the nation's output of goods and services is higher than ever. In 2000, the U.S. gross domestic product was $9.87 trillion. This is 65% higher than in 1991, when GDP was $5.99 trillion, the Commerce Department reports (figures not adjusted for inflation). The GDP for the first quarter of this year was revised to a growth rate of 1.3%. The economy has now been growing for 11 consecutive years, the longest expansion on record. But the state of the economy has long been judged by relative measures such as growth--not by absolutes. And by this measure, the economy is faltering. This makes some sense. Consumers and businesses alike tend to feel rich not just because they are rich, but because they are getting richer. Call it the Fernando Lamas effect: It is better to feel good than to look good. When consumers and businesses are optimistic, they spend more and invest more, with all sorts of positive results. Despite the bad news, consumer confidence is relatively stable, and the little people still buying houses and cars are helping the economy look good. What economic growth there is may be attributed to an increase in personal consumption expenditures, state and local government spending, and home buying. The $40 billion in tax rebates being sent out now may further boost consumer spending. In the business sector, the opposite is happening. The economy's sluggish growth in the second quarter of 2001, its slowest since 1993, was caused by an actual retraction in business spending on equipment and software, and in spending on nonresidential structures. Many economists believe the U.S. will be able to avoid a recession--defined as two consecutive quarters of negative growth--and forecast steady improvement for the rest of this year. At the same time, inflation slowed dramatically to an annual 1.5% rate, down from 2.7% in the first quarter. Stable prices will give the Federal Reserve room to cut interest rates for the seventh time this year when it meets on Aug. 21. While consumer spending has kept the economy in positive territory so far, the consensus is business spending will soon pick up and offer some help. Reasons include falling interest rates in response to the recent short-term interest rate cuts by the Federal Reserve, lower energy prices, and the tax rebate. Many analysts said they looked for growth to rebound to around 2% in the current quarter and 3.5% in the fourth quarter. The hardest hit sector by far in the recent slowdown is manufacturing. That sector has lost 785,000 jobs in the last year, more than the much larger service sector, according to Bureau of Labor Statistics reports. While the loss of manufacturing jobs is partly a long-term trend, it has been exacerbated by a strong dollar that makes U.S. exports more expensive and imports from overseas even cheaper. Indeed, real exports of goods and services decreased 9.9% in the second quarter, compared with a decrease of 1.2% in the first. Real imports dropped 6.7%, compared with a decrease of 5% in the previous quarter. But the big story is the slowdown in business spending. Companies reduced investment spending for new plants and equipment by 13.6% in the second quarter. This was the sharpest drop since the severe recession of 1982. Cuts came in response to a buildup in inventories, falling profits and a decline in sales growth. Businesses feel terrible. And when they feel terrible, they look terrible.