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Pastimes : Clown-Free Zone... sorry, no clowns allowed -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (207384)	12/1/2002 9:14:26 AM
From: JHP	Read Replies (1) \| Respond to of 436258

11/26 14:19 Economy Doesn't Get Deserved Respect: Caroline Baum (Correct) By Caroline Baum Economy Doesn't Get Deserved Respect: Caroline Baum (Correct) (Corrects the percent change in computer spending and year in 16th paragraph. Commentary. Caroline Baum is a columnist for Bloomberg News and host of ``No Nonsense'' on Bloomberg Radio. The opinions expressed are her own.) New York, Nov. 26 (Bloomberg) -- I've spent most of this year trying to figure out whether the U.S. economy is better than it feels or worse than it looks. I still don't have the answer, even though how it looks got a whole lot better. The U.S. economy expanded at a 4 percent annualized rate in the third quarter; one month ago, the Commerce Department's growth guesstimate was 3.1 percent. For the first three quarters, GDP growth averaged 3.4 percent, which is none too shabby for a country whose literal and figurative core was devastated a little over a year ago when two planes plowed into the World Trade Center. Granted, it's not the typical 5 percent growth usually experienced following a recession. But there is probably not an economist on Wall Street who predicted growth anywhere near the 3.2 percent delivered in the four quarters following the terrorist attacks. Growth hasn't been fast enough to bring the unemployment rate down: faster productivity implies a higher potential growth rate and means companies can produce more with fewer workers. Still, the economy is not the disaster the doomsters predicted. Structurally Speaking The expansion is still uneven, relying mostly on the whims of the consumer. Real consumer spending rose 4.1 percent last quarter, contributing 2.9 percentage points to GDP growth. Business fixed investment was a small drag (.07 percentage point) -- the smallest in two years. The 0.59 percentage point subtraction from structures (the ``plant'' part of plant and equipment spending) was offset by the 0.52 percentage point addition to GDP from equipment and software. Structures typically lag the business cycle by six to 12 months, according to Henry Willmore, senior U.S. economist at Barclays Capital Group. ``In the last recession, private non-residential construction bottomed almost two years after the economy,'' using the monthly data on construction spending, Willmore says. Spending on equipment and software rose 6.6 percent last quarter, the biggest increase since the second quarter of 2000. That follows a 3.3 percent increase in the second quarter after six consecutive quarterly declines. `V' for Victory What's odd is that the perception persists that there is no capital spending going on. Even that old data miner himself, Federal Reserve Chairman Alan Greenspan, said as much in a speech to the Council on Foreign Relations last week. ``There is a very large hurdle at this stage against making any capital investment,'' Greenspan said. ``Nobody is doing anything, or I should say, most everybody is doing nothing.'' If one looks at a graph of the quarterly change in equipment spending, the pattern looks like what traders call a ``V'' bottom. This component of capital spending went from a 15.5 percent increase in the first quarter of 2000 to a 16.7 percent decrease in the second quarter of 2001. From that point, the declines decelerated before turning positive in the second quarter of 2002. ``At worst you can say that capital spending has stabilized,'' Willmore says. ``I suspect that with the passage of terrorism insurance, commercial construction will start to do better.'' When it comes to that fallen angel, technology, there was some surprising news in today's report. ``Year to date, computer spending is up 32 percent annualized, the best year since 1998,'' says Jim Glassman, senior U.S. economist at J.P. Morgan Chase. Profit Squeeze Inventories added about 0.5 percentage point to third-quarter growth, which means that the bulk of the acceleration from the second quarter's 1.3 percent rate was final demand. Real final sales (GDP less inventories) rose 3.5 percent, while domestic final demand, which measures what we consume, not what we produce (it includes imports and excludes exports), rose 3.4 percent. The one piece of today's GDP that was not optimistic -- even confusing to some economists -- was corporate profits. Profits from current production, which adjusts for the value of inventories and depreciation allowance, fell 1.8 percent in the third quarter, the third small quarterly decline following the fourth quarter's 18.1 percent surge. That increase was largely the result of a decline in unit labor costs, according to the Commerce Department. Since the fourth quarter, prices per unit of real gross product of nonfinancial corporations have been falling while unit non-labor costs have been inching up, squeezing margins. Broader Expansion Given the strong third quarter productivity -- 4 percent and likely to be revised one percentage point higher -- economists had expected more of the growth to be reflected in the bottom line. ``Nominal GDP is not growing fast enough or broad enough to bring up corporate profits,'' says Joe Carson, an economist at Alliance Capital Management. As the expansion becomes more balanced and broadens out from the current concentration in consumer durables, housing and defense to capital spending -- something Carson says is already happening -- fourth quarter profitability will improve as well. Maybe then the expansion will get the respect it deserves.