Economy Churns As Consumers Spend
New gross domestic product and confidence figures show an America feeling strong.
The pedal is to the metal for the US economy.
Consumers are hitting the malls; business is buying new bulldozers; and, construction crews are loading their nail guns at near record rates.
Yesterday, the government reported that this near-frantic pace resulted in a surprisingly strong first quarter gross domestic product which grew at a 4.2 percent annual rate. The strong growth occurred despite the fact exports fell sharply - perhaps reflecting the financial turmoil in Asia. If the economy were to continue at this pace, economists are sure it would prompt the Federal Reserve Board to raise interest rates.
"The Federal Reserve will be looking very carefully to see how much slowing occurs in the second quarter," says Robert Dederick, a consulting economist at Northern Trust Company in Chicago.
Despite the strong gains in the beginning of the year, most economists believe the American economy will start to brake. Exports are surging into the country and taking away market share from US businesses. This was evident yesterday in news that inventories have risen sharply. Those exports - many from Asia - are being offered at such competitive prices, Americans are on a shopping binge. "The Asian shock is actually giving a push to domestic demand," says Mr. Dederick.
The strong first quarter comes at a time when the Federal Reserve is increasingly anxious about the high-flying economy. There were reports this week that the Fed's governors, in their March meeting, were "leaning" towards higher short-term interest rates. "I believe there are growing tensions in the Fed," says Lyle Gramley, a former Fed governor.
But like many private economists he doubts the Fed will raise rates soon, despite the strong economy, since there are still few signs of inflation. Yesterday, for example, the Labor Department reported that workers' pay and benefits rose only moderately in the first quarter. "My guess is the Fed will not do anything in May," he says. The Fed's Open Market Committee, which sets interest rate policy, meets on May 19.
Many economists expect the economy will moderate its pace because of the Asian problems. Already, exports are pouring into the country and the nation's trade gap with Asia is swelling. Robert Brusca, chief economist at Nikko Securities Co. International Inc. believes this trade imbalance is starting to lower US manufacturing orders. With the economy starting to slow, he says, "The Fed not only needs a smoking gun, it also needs a dead body."
For a while it appeared the sharp rise in stock prices would give the Fed an excuse to hike interest rates to stymie speculation. Yesterday morning, the Dow Jones Industrial Average broke through the 9000 mark once again as some investors were cheered at the low inflation but high growth news.
Mr. Gramley, now a consulting economist at the Mortgage Bankers Association in Washington, is convinced the stock market is providing a lot of the economy's energy. Higher stock prices make people feel wealthier and so far the Dow average is up 12.5 percent this year.
There is no question the stock market is helping some businesses. For example, Eric Goetz, president of the Bristol, R.I. Eric Goetz Custom Sailboats, is having one of his best years. He's currently building four large boats, including a 98-foot powerboat. Two of the owners recently sold their companies. "Now, they're going for the toys," says Mr. Goetz who says the orders have helped him "bulk up" his work force.
But there are still lots of communities that are not affected by the rising stock prices. This is the case in Morris, Ill. where H. James Baum, president of Baum's, a dry goods retailer on Main Street, says the stock market rise has not generated a lot of wealth in the agricultural and manufacturing area. Rather, he says his customers are "cautiously optimistic" about the economy.
Mr. Baum's experience may be more related to geographic and demographic conditions, says Tracy Mullin, president of the Washington-based National Retail Federation. Many retailers across the country, she says, are having an exceptional year. "In the South, I know one member who has been in the business for a long time and he's having the best quarter in his history."
In fact, this week, the Conference Board, a business research organization reported that consumer confidence remained at close to a 28 year high. On the basis of the survey, the organization expects "continued moderate economic growth," says economist Lynn Franco. "The consumer is not raising the red flag."