Re-Post:
Economy looks up in valley and U.S.
BUT THE GAINS MIGHT HAVE A CATCH
By David A. Sylvester
Mercury News
For the first time in two years, both the national and Silicon Valley economy appear poised to grow faster than expected, primarily fueled by the most massive government stimulus in the postwar era.
The question is no longer when the economy will recover. Instead, it might be: Has the amount of government intervention stimulated activity today at the expense of problems later?
Bush administration officials have taken credit for the revival of economic growth, arguing that their tax cuts have helped stimulate the economy. But they recognize that the loss of jobs remains a problem.
Stephen Friedman, President Bush's assistant on economic policy and director of the National Economic Council, is scheduled to discuss such issues today with the fellows and staff of Stanford University's Hoover Institution. The meeting is a part of a series of speeches on the West Coast scheduled to promote the administration's economic program.
Friedman's visit comes after the latest data and forecasts show a surprising surge. The national gross domestic product jumped to an annual rate of 7.2 percent in the third quarter. Locally, the Semiconductor Industry Association has just predicted faster growth for the chip industry.
As result, more economists and analysts are becoming optimistic about the outlook for the next few months, and with it the prospects for a continued stock market rally.
```We're going to see stronger economic growth into 2004,'' said Jim Stack, president of InvesTech Research, who was pessimistic during the bubble in the late 1990s. ``Right now, we see unique alignment of pressures for a bull market.''
At least for now. He is less sanguine about the longer term. ``There is a substantial risk we're borrowing from future growth,'' Stack said.
Some analysts point to a number of disturbing signs that make this recovery different than previous postwar recoveries. Compare the past two years of this recovery with a similar two years of ``jobless recovery'' after the 1990-91 recession:
• The lowest interest rates in almost 50 years are encouraging consumers to stock up on automobiles, furniture and household goods that they may not buy later. The Federal Reserve Board has kept short-term interest rates at 1 percent, almost half the rate of inflation, creating ``negative interest rates'' to encourage spending.
As a result, a third of the total increase in inflation-adjusted GDP since it bottomed in the third quarter of 2001 has come from consumers spending on durable goods: autos, furniture and household appliances. In 1991 to 1993, this spending was only 11 percent of the total two-year gain in real GDP.
• One-quarter of the gain in gross domestic product has come from a surge of spending by governments that may be trimmed later. During the past two years, $145 billion of the $610.8 billion gain in real GDP came from an increase in government spending, largely by the federal government. In 1991 to 1993, none of the gain came from the government because government spending actually fell slightly, adjusted for inflation.
• Investment spending has lagged badly. During the 1991-to-1993 recovery, when the economy was 30 percent smaller, overall investment spending rose by $149 billion, compared with an increase in the current two-year recovery of just $81.8 billion.
The key sector of investment for Silicon Valley -- spending on equipment and software -- rose in the past two years by $69.6 billion, similar to the $63.5 billion increase in the 1991-to-1993 recovery. But this bust feels worse because the industry is now so much larger, so that its growth rate over the past two years is half the rate of the two years after 1991.
• A loss of jobs to overseas production plants is permanently reducing the manufacturing workforce in the United States. This could undercut future wage growth unless new industries or services expand fast enough to offset the loss.
By the third quarter of 1993, two years after the recession, the U.S. economy had created 2.8 million new non-farm jobs. During this two-year recovery, the nation has 1 million fewer non-farm jobs, according to the Bureau of Labor Statistics.
The unprecedented stimulus of ultra-low interest rates, tax cuts and rising federal government spending is making some analysts wonder what the economy would look like if it were left alone. Barry Ritholtz, chief market strategist at Maxim Group in New York, has questioned whether the government has created a ``Frankenstein economy,'' a dead body energized by jolts of electricity.
``We've had an orgy of intervention,'' Ritholtz said. ``Right now, we're applying electricity. It does not mean we have reanimated dead tissue.''
The analogy may go too far, but it points to a central worry.
``We've never been losing jobs this far into a recovery,'' says Lakshman Achuthan, managing director of the Economic Cycle Research Institute.
While the fast economic growth almost guarantees some kind of job growth over the next year, it will most likely fall far short of previous recoveries. Estimates are that the U.S. economy may add 50,000 to 100,000 new jobs a month next year, a relief from the current erosion of jobs.
However, that falls far below the normal expansion rate of 250,000 to 300,000 jobs a month.
``Stimulus doesn't solve the problem of jobs,'' Achuthan said. |
