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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (15069)	11/7/2004 11:59:19 PM
From: RealMuLan	Read Replies (1) \| Respond to of 116555

Keep an eye on the private sector By Charles Stein \| November 7, 2004 After an endless campaign in which the focus was on Washington, it is useful to keep one thing in mind: When it comes to the economy, most of what matters happens in the private sector. ADVERTISEMENT Yes, tax rates are important. So are the interest rate moves engineered by the Federal Reserve. But if you want to know why job growth, until recently, has been sluggish, why manufacturing jobs have been disappearing, why inflation has been modest, why gasoline is expensive, and why mortgages are cheap, you are not going to find the answers in Washington. Instead, you need to look at the key market forces shaping the economy, both here and abroad. Those forces are not Republican or Democratic and they don't switch on and off after Election Day. I could tick off a long list of developments that have influenced the economy these past few years, but I will mention just three that have been particularly critical. Productivity growth. Thanks to a combination of new technology and intense competition, American companies have boosted their productivity. In other words, they are getting more out of each worker. A decade ago productivity was growing roughly 1.5 to 2 percent a year. Since 2000 productivity growth has averaged 3.5 percent a year. "Productivity growth determines our standard of living and it is the most fundamental reason we have to be optimistic," said Mark Zandi, chief economist at Economy.com, a Pennsylvania forecasting firm. The good productivity numbers explain why business profits have been so robust. They also explain why companies have been unusually slow to add workers. If you can squeeze more out of your existing workforce, and make a lot of money in the process, why go out and hire? "A president can't make companies hire if they don't want to hire," said Allen Sinai, chief economist at Decision Economics in New York. Hiring has picked up in the past few months. By keeping a lid on business costs, productivity growth has also contributed to low inflation. The communications revolution. The Internet hasn't changed everything, but it has changed a lot. It has eliminated middlemen throughout the economy (Have you used a travel agent recently?) and allowed businesses and consumers to cut costs by shopping smarter. The Internet's rise is the reason book stores and record stores are vanishing. It also explains why Google, the hottest of the new media companies, has twice the market value of Gannett, the giant newspaper chain. In combination with other advances in communication, the Internet has made it possible to farm work out to distant locations, including Bangalore. Which neatly leads to the third key market development. The rise of China and India. When the two most populous nations on earth join the global economy and start growing fast, attention must be paid. The explosion of these two economies has reverberated around the globe. "It has been a tremendous boon to the emerging countries that sell commodities," said Nariman Behravesh, chief economist at Global Insight in Waltham. China's voracious appetite for raw materials has boosted the price of everything from steel to oil. China's rise as a manufacturing powerhouse is one reason the United States has lost 2.7 million manufacturing jobs since 2000. On the flip side, China's low-cost production has helped keep a lid on US prices. Finally, China's willingness to use its supply of dollars to buy US government debt has made it possible for Washington to run a massive budget deficit without raising interest rates. India is a smaller economy, but it is already having an impact. If China is the world's workshop, India is the world's back office. Its information technology workforce has eliminated US jobs and cut the cost of doing business. Over time, the two economies will represent both competition and opportunity for American companies. Don't get me wrong. I'm not suggesting Washington is irrelevant. Over the next four years the Bush administration may try to cut the budget deficit, simplify the tax code, and privatize Social Security. The Federal Reserve will aim to keep the economy growing with minimal inflation. The outcome will affect us all. But here's a piece of advice: If you watch only what goes on in Washington, you are going to miss most of the action. Charles Stein is a Globe columnist. He can be reached at stein@globe.com. © Copyright 2004 Globe Newspaper Company. boston.com