Steve Quayle News Alerts

Oct 19, 2003

WASHINGTON (AFP) - The US economy is red-hot, economists say, with confirmation of the trend expected in official growth figures later this month. But is it for real?

Experts are ramping up their forecasts for third-quarter US gross domestic product, the first estimate of which comes from the government October 30.

Forecasters who have been calling for growth of four to five percent are now bumping up that to six or even seven percent, based on indicators such as consumer spending, industrial production and other data.

"We look for extremely solid growth of 6.0 percent in the quarter," said Lehman Brothers economist Ethan Harris, the fastest rate since the fourth quarter of 1999. GDP grew at 3.3 percent in the second quarter.

"Consumption is particularly strong, benefiting from a 'perfect storm' of positive tailwinds: lingering cash-out refinancing effects, tax cuts and a post-war boost to confidence. In addition, even the long-languishing business fixed-investment figures are likely to pick up in the quarter."

An even more optimistic outlook comes from Sung Won Sohn, chief economist at Wells Fargo Bank.

"The sizzling economy will produce seven percent economic growth during the July-September quarter," Sohn said.

"For the first time in this recovery, consumers and businesses are joining forces. Significant hiring by businesses will be the final confirmation that sustained economic growth is here to stay."

But a note of caution comes from Merrill Lynch North American economist David Rosenberg, who argues that the economy is benefiting from temporary factors.

Rosenberg said that the latest reports on retail sales "bakes into the cake a six-percent figure for GDP."

But he said consumers have been spending money from tax cuts and mortgage refinancing and buying new automobiles with cut-rate financing. Income from other sources has been growing only sluggishly, he said.

"How, then you ask, has the consumer been able to stay alive? Because in addition to what the mortgage market gave in terms of debt service relief and cash-out refinancings, Uncle Sam's generosity -- blowing a hole through his income statement by massively cutting taxes and borrowing the funds from Japan Inc."

Rosenberg worries that if the job market fails to rebound, it will dent consumer confidence and spending. Although recent data show a slight drop in new jobless claims and a small gain in September payrolls, economists debate whether this is a trend.

Rosenberg argues that the job market may be stabilizing but is not yet growing quickly enough to be self-sustaining.

"We have graduated from a 'job-loss' to pretty well a 'job-less' recovery," he said.

"Bottom line: This economy is still short three million jobs benchmarked against where the employment level should be at this stage of the cycle."

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