Outlook for economy: improvement. Positive factors outweigh trade deficit, dip in auto sales
The United States economy is showing signs of improvement, indicating growth will continue through the rest of the year. ``We're not muddling along. There is no region in the country where things are not better or improving,'' says Allen Sinai, chief economist for Shearson Lehman Brothers Inc. ``Things are percolating along rather nicely,'' agrees Richard Rahn, chief economist for the US Chamber of Commerce in Washington.
The economic optimism comes despite the fact that the Commerce Department on Friday revised downward the growth of the nation's gross national product (GNP) in the second quarter to 2.3 percent, from an earlier estimate of 2.6 percent. The revision was caused by Commerce Department numbers that showed exports did not grow as fast as originally reported.
Better news came on the inflation front Friday when the government said consumer prices in July rose modestly, by only 0.2 percent. The Commerce Department numbers showed food prices declined while oil-price gains moderated.
The low consumer price index is not indicative of the underlying inflation rate, says Mr. Sinai, who estimates inflation is running around 4.5 percent annually. But James Fralick, vice-president and senior economist at Morgan Stanley & Co., says he believes the low inflation number will keep the Federal Reserve Board from tightening interest rates. ``It's a pretty good number, and it should be enough to keep the Fed on hold here for a while,'' he says.
Low inflation alone will not keep the Fed from tightening rates. Instead, says William Sullivan, the direction of the dollar will influence monetary policy. Mr. Sullivan is a senior vice-president at Dean Witter Reynolds, a Wall Street brokerage house. Within the past week, the dollar has fallen sharply. ``We are at the point where people are starting to get concerned,'' he says.
Many economists are convinced the downward revision in the GNP, a broad measure of economic health, marks the economic low water mark for the year. Robert Eggert, publisher of the Blue Chip Economic Indicators, expects the lower base will cause many economic seers to raise their forecasts for the third quarter. By the fourth quarter, the 51 economists surveyed expect a growth rate of 2.9 percent.
Economic growth would be stronger if it were not for Detroit's problem selling automobiles. Larry Chimerine, chief economist at Chase Econometrics in Philadelphia, estimates lackluster car sales are taking between 0.5 to 1 percent off economic growth. Mr. Chimerine, who takes a more pessimistic view, says he believes the weakness in auto production could make the second half of the year more anemic than the first half. ``The cutbacks are sizable,'' he says.
Still other segments of the economy are back on track. After a weak first half, housing starts are finally improving. Last week the government reported July housing starts were up 0.9 percent, after dropping for four consecutive months.
The outlook for housing, says John Tuccillo, chief economist for the National Association of Realtors in Washington, is good with housing starts falling only slightly from last year's level. ``It looks like interest rates and prices are not a barrier in this market,'' says Mr. Tuccillo who also notes that consumer confidence remains high.
Another brighter spot is capital spending, which fell in the first half of the year. An earlier survey by the Conference Board, a nonprofit business organization, found business expects to increase spending by between 8 and 9 percent this year. Ken Goldstein, a Conference Board economist, says there are indications that this is happening. ``There are very strong expectations for the second half,'' he says.
Economists also expect consumers to begin shifting from imports to domestic manufacturers as they notice higher prices for everything from imported clothes from the Orient to sports cars from Europe. ``If the past is any guide at all, consumers will seek out the best value and keep this long expansion alive through this year and probably next year as well,'' says Paul Boltz, a financial economist with T.Rowe Price Associates in Baltimore.