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Article Excerpt
Economic experts, a pessimistic group by nature, grudgingly agreed that a turnaround in the U.S. economy is likely in 2004, during their remarks Sept. 22-23 at MSCI's Economic Summit in Chicago.
"The good news is the economy is poised to grow stronger for as far as my eye can see. The bad news is I can't see very far," said Paul Kasriel, senior vice president and director of economic research with Northern Trust Bank.
The economy can't help but grow faster, given the fiscal and monetary support from the federal government, including low interest rates and the recent tax cut. "The July tax cut added an extra $100 billion to the after-tax paychecks of household America, on an annualized basis. We will continue to see the positive impact of that tax cut at least through the first quarter of next year," he said, when many more taxpayers than usual will see larger than normal tax refunds.
The Fed's low interest rates have given consumers a tremendous source of extra spending power, the equity in their homes. In the second quarter of 2003, American households withdrew $450 billion, at an annual rate, of equity in their houses, equal to about 5.5 percent of disposable income. In the second quarter, consumer spending grew at a 3.8 percent annual rate, and the third quarter could hit 5 percent or more. "It could slow in the fourth quarter, but still, the tax cuts and easy-money policy the Fed has been pursuing are starting to work their magic," Kasriel said.
The strong housing market has sustained the economy, but with mortgage rates on the rise, it is likely to plateau. Federal spending, notably defense spending, will be a big growth market next year. "In an election year, we're not going to see a slowdown in non-defense expenditures, either, so the federal government will be a major contributor to strong demand."
Capital spending is also showing signs of life. In the second quarter, spending on capital goods grew at an annual rate of about 8 percent. "Corporate profits have improved, and that is a big factor that will lead to stronger capital spending," Kasriel added. "We won't see a boom like in the '90s, but I think the worst is over for at least the next four quarters."
Kasriel forecasts growth averaging 3.5 percent for the next four quarters, but he warned that high unemployment and the growing trade deficit pose a serious future threat.
Tim O'Neill, executive vice president and chief economist with the Bank of Montreal Financial Group, forecast an even more optimistic 4 percent growth rate for next year, fueled by both defense and consumer spending, but he, too, is concerned about the labor market.
"Since the beginning of the recession in March 2001, 85 percent of the job losses have been in manufacturing. This has been a downturn that is predominantly manufacturing, which is not typical. The key then to the recovery in the labor market is going to be the turnaround of manufacturing employment," he said.
He expects employment growth to hit 100,000 jobs per month soon, and 200,000 sometime next year, reversing the unprecedented downtrend of the past two and a half years. For an economy to grow at even 3.5 percent, it needs to create 150,000 new jobs each month, he explained.
While most forecasters predict growth ranging from 3 to 7 percent next year, where they differ is on the sustainability of that recovery through the second half of 2004, O'Neill said. "I think we have the trifecta of stimulus working in our favor: the low interest rates, the weaker dollar, which is helpful to the manufacturing sector, and government fiscal policy. In that kind of environment, the economy cannot help but recover on a sustained basis."
Growth in Canada has stalled somewhat, after outpacing the United States for the last four years, due to a strengthening Canadian dollar, weakening exports to the U.S. and fears over the SARS virus, among other factors, he said.
AUTOMOTIVE
FORECAST STRONG FOR STEEL
Carmakers are always looking for new materials that can offer greater performance and safety at a lower cost to consumers and the environment. For the foreseeable future, however, steel will retain its position as the material of choice for auto manufacturers, said Subi Dinda, a senior manager at DaimlerChrysler Corp.
In contrast to the early days when the Model T was made primarily of steel, cast iron and wood, today's cars are 60 percent steel, 10 percent iron, 6 percent aluminum, 16 percent polymers and 8 percent other materials. By 2005, those proportions are expected to shift, though only slightly, to 58 percent steel, 8 percent iron, 7 percent aluminum, 19 percent polymer, and 8 percent other materials.
"Iron and steel's share will decline at the hands of aluminum and polymers, though not dramatically," Dinda said. "Though steel offers limited weight savings potential, it remains the most cost-effective material."
Every 100 pounds of weight saved adds roughly 1 mile per gallon to a vehicle's fuel efficiency. While aluminum offers a 50 percent weight reduction, and...
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