Economy Hums As US Businesses Fill Order Books - Often Into '97
With only a few months left before the US elections, the economic statistics are going President Clinton's way.
"Our economic strategy is working," Mr. Clinton said yesterday, citing news that the economy grew at a 4.2 percent annual rate in the April to June period.
Although economists generally believe the economy has slowed in June and July, the Commerce Department will provide only one more quarterly snapshot of the US economy before the November vote.
"By the time people vote, there won't be a lot of new information. Unless something happens quickly, people will have the perception that the economy is doing quite nicely, thank you," says Robert Dederick, an economist at the Northern Trust Company in Chicago.
Economists will now be watching the July employment report, which is issued today. If the jobless rate shrinks from its current 5.3 percent level, many economists believe the Federal Reserve will tighten interest rates later this month to keep inflation from rekindling.
The report's employment numbers, meanwhile, will be swollen by the addition of 50,000 temporary workers at the Atlanta Olympic games.
The economy during the first half of the year has been bolstered by consumer spending. In addition, the auto industry bounced back from a weak first quarter. Another boost came from companies restocking inventories to meet strong demand. But there is evidence that consumer spending has moderated over the past two months. The interest-sensitive housing sector is also showing some signs of slowing down in response to higher mortgage rates.
Indeed, the economy grew at a "very slow rate" in July, after expanding strongly in June, the National Association of Purchasing Management in Tempe, Ariz., reported yesterday.
The second-quarter gross domestic product's showing was the best performance since a 4.9 percent surge in the second quarter of 1994. The GDP is the total output of goods and services.
US manufacturers don't expect much change between now and the election. A recent survey of 1,000 manufacturing executives found business expects steady growth to continue over the next three months. But the Dun & Bradstreet Corp. survey also found a fairly high level of caution, with little enthusiasm for investing in new production capacity or higher inventories. Even though orders are growing at their highest rate since the end of 1995, manufacturers doubt the current level of demand will last through the summer.
Some of that skepticism is shared by Larry Mocha, president of Tulsa-based Air Power Systems Inc. "I'm concerned about the elections and the effect that they will have on the economy," says Mr. Mocha. He is concerned despite the fact that his business of supplying pneumatic air controls for large trucks is growing at 10 to 15 percent this year, with no sign that orders are drying up.
Though some businessmen might be cautious, consumers appear buoyant. On Tuesday, the Conference Board, a business research organization, reported Consumer Confidence had reached a six-year high in July. The latest survey results "confirm that consumers are clearly confident about current economic conditions and anticipate further economic growth in the months ahead," says Edgar Fiedler, an economist at the board.
Some of this confidence is reflected in the order books at Goetz Custom Sailboats Inc. in Bristol, R.I. Owner Eric Goetz says the company has work lined up through next April building boats that sell for $400,000 to $3 million. He says this is one sign of confidence in the economy, because even the well-to-do are effected by the economic tides. "If they don't feel good, they may just postpone an order," Mr. Goetz says.
Even though business is good, there is little room for price increases - something that rankles many companies. "It is still a price- and value-driven business," says Michael Pisch, controller of Abar Ipsen Industries Inc. a Rockford, Ill., producer of vacuum furnaces used by the auto and aerospace industries.
The service sector has also hit this price ceiling. Although bookings at the Radisson hotel chain remain strong, room rates have had to stay competitive. "I'd like to see a little inflation in the right places," says John Nordlander, president of Carlson Hospitality Worldwide, the chain's owner.
While the business community might like to raise prices, the Federal Reserve Board doesn't share the same view. When the Fed meets on Aug. 20, some economists now believe the central bank will consider hiking short-term interest rates.
"Right now, I would say a one-quarter of a percentage point increase in the Fed Funds Rate," says Kevin Flannigan, an economist at Dean Witter Reynolds in New York. The Federal Funds Rate is the fee that banks charge each other for overnight loans.
The interest decision, however, will be difficult. There are still no signs of significant inflationary pressures. This week, the Labor Department reported wages and benefits increased by 2.9 percent from 1995 second-quarter levels.