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Growth forecasts ratcheted higher

The nation’s economy appears to have grown at a stunning pace of more than 6 percent in the third quarter.  But will the good news last into the crucial months of next year’s election campaign?
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President Bush is likely to get one of the best economic reports in years this month when the Commerce Department offers its initial estimate of third-quarter growth. The question is, will the good news last into the crucial months of next year’s election campaign?

With the latest revision to the summer’s retail sales and trade figures, forecasters have been busy marking up their spreadsheets and now widely estimate the economy grew at a stunning rate of more than 6 percent in the third quarter, the fastest pace since late 1999. The expected result would vindicate economic bulls who said the unprecedented triple stimulus of tax cuts, low interest rates and a weakening dollar would combine to produce the strongest growth in years.

The problem, of course, is that the economy is unlikely to experience anything like that stimulus in coming months, leaving the future of the expansion heavily dependent on the willingness of businesses to create jobs, which so far have been sorely lacking.

“The big risk factor is whether the job market is going to come into play and really cement a recovery into place,” said Ed McKelvey, senior economist at Goldman Sachs. “Employment is not a leading indicator — it’s the glue that holds the process together by creating jobs and income and recycling the dollar back to the labor force.”

Goldman Sachs recently boosted its third-quarter forecast to 6.5 percent from 5 percent but left unchanged its forecast for 4 percent growth in the current fourth quarter. On average forecasters are estimating 6.2 percent growth for the third quarter, according to Thomson Global Markets, and some analysts have published predictions as high as 7 percent.

But nobody expects the economy to continue expanding at such a superheated pace, with most analysts calling for growth of around 4 percent in the current quarter, slightly above the economy’s long-term “trend” rate of about 3.5 percent. Goldman Sachs predicts growth will fade substantially next year from a peak of 3.5 percent in the second quarter to just 2 percent in the fourth quarter.

That kind of a slowdown to weak growth easily could mean a flat or rising unemployment rate, offering Democrats precisely the ammunition they will need if they hope to unseat the politically formidable incumbent in November.

“At the end what you really care about is that the unemployment rate doesn’t go up, and hopefully that it goes down,” McKelvey said. “Under our forecast, Democratic candidates would have a shot at the presidency if they can capitalize on the economic and foreign policy issues.”

Another forecaster, Wells Fargo chief economist Sung Won Sohn, is more optimistic about growth, estimating 7 percent for the third quarter and about 4 percent through mid-2004. But even that may not be enough to bring down the unemployment rate from its current 6.1 percent as the improving economy brings new job seekers “out of the woodwork,” he said.

“I’m not at this point that confident the economy will be a plus for President Bush,” Sohn said.

While recent reports indicate that layoffs are waning and employment levels are at least stabilizing, a recent survey of big-company chief executives offers little encouragement on the labor front. While CEOs have grown more optimistic about the economy in general over the past few months, only 12 percent plan to boost U.S. employment in the final quarter of the year, according to the survey by the Business Roundtable. And a startling 36 percent said they plan to cut U.S. employment in the final quarter.

The Business Roundtable is an exclusive group of 150 CEOs, representing some of the nation’s biggest corporate employers, of whom 111 responded to the quarterly survey. Of course hiring plans can change if consumer demand remains strong, but the survey results show that large employers, who are now seeing the fruits of aggressive cost-cutting in higher profits, are extremely reluctant to add permanent full-time workers to their U.S. plants.

The economic crosscurrents of strong growth and weak hiring mean the Federal Reserve is unlikely to make any shift in policy when rate-setters next meet Oct 28, nor are they likely to boost short-term interest rates until well into 2004, analysts say.

“Fed officials probably believe, as we do, that the growth spurt had a hefty transitory element, rooted in the tax cut, and they remain apprehensive about the U.S. labor market,” McKelvey said in a note on the economy.

Central bankers certainly seem to have no reason to worry that the sustained low interest rates are likely to cause a worrisome increase in inflation. In fact the latest figures indicate the Fed probably still has more reason to worry about deflation, or a dangerous decline in overall prices.

Excluding the food and energy categories, as Fed officials usually do, consumer prices rose just 1.2 percent in the 12 months that ended in September. That was the slowest pace of inflation since 1966.