02 May 2003 Behind the Numbers
These days, pretense doesn’t enter the equation when people talk about their money, their livelihood, their personal well-being or that of their families. I’ve had many a “heart to heart” with clients and friends on just those subjects over the past several months and I’m sure you have too. People have been scared economically and physically for what seems like a very long time. Household budgets are tight, jobs are scarce, and people seem to be hunkered down.
Psychologists say that we begin to accept as the norm those feelings that are with us for two to three years. We have become used to being worried and pessimistic now just as we were accustomed to being “exuberant” and optimistic only three years ago. But, one thing that history assures us of is that pessimism or losing doesn’t live well or long in this country. We are a diverse, competitive, well-educated, and spirited group of people.
This ‘slowdown’ doesn’t look so bad on paper. The economic statistics reported by the government and highlighted in this publication every week provide a faceless, clinical report of the health of theU.S.economy. But when we talk to people who are living it, the reports are decidedly more somber. When you are one or you know someone among the 6% of the country’s workforce looking for work without success, you take little solace in the fact that 94% of the country is at work. In April, the manufacturing sector cut 96,000 jobs. The non-manufacturing sector saw payrolls cut by 48,000 more people.
I have talked to many who are looking for work or feel that they may have to begin looking soon. Those who by nature are more optimistic, continue to have faith and generally view their outlook with continued optimism, but they are more cautious then they have been in a long time. Small business people, who know risk and hard work, are more vigilant than ever, checking their numbers more in a week than they did in a month or quarter during the good times.
But the possibility for strong improvement continues to lie just below the surface of this economy. Plant managers tell me that big projects have been approved by management, but are on hold until there are stronger signs the economy is picking up. They say they will hardly be able to hire and train fast enough when the ok is given by their management. CEO’s in select industries that have been negative until now are turning more positive in their remarks. The stock market, over the past month, seems to be taking this rising optimism seriously and has increased accordingly.
From the deck of the nuclear aircraft carrier U.S.S. Abraham Lincoln, US President George W. Bush declared that “major combat operations inIraqhave ended.” Many Americans watched the richly patriotic celebration of victory aboard the carrier. Since the tragedies of 9/11 there have been no major terrorist attacks onU.S.soil. Attorney General John Ashcroft recently provided a long list of accomplishments of the joint operations of the FBI, CIA, and local law enforcement in successfully thwarting terrorist plots.
Chairman Greenspan in his continuing testimony before the Congress said that he remains hopeful on the economy. His statement highlights just how tentative recovery is. Recovery from this malaise will come only when moods and confidence improve and it is my conviction not only that there is improvement, but there are significant reasons to expect further improvement. There is a saying on Wall Street that you should never fight the Fed and this Fed wants to get this economy growing again. They have lowered rates to historic levels, but their influence is far from exhausted. Another step could be the purchase of five and ten-year treasuries. That action pumps more cash into the economy to stimulate consumption and it brings down long term rates stimulating corporate borrowing.
In his address last night President Bush outlined the success the U.S. is having in the war on terrorism. He said “we are committed to freedom in Afghanistan, in Iraq, and in a peaceful Palestine. The advance of freedom is the surest strategy to undermine the appeal of terror.” The decline of terrorist threats will have a huge positive impact on the economy as current investments in security can be turned to more productive aims.
The cost of oil will drop as the Iraqi oilfields begin production in the coming months. OPEC will likely be unable to maintain prices in the mid-20’s as they recently stated. Experts expect that oil may fall as low as $18 per barrel within the coming 12 months. Cheaper oil is a huge stimulant to the U.S. and the global economies.
Unemployment statistics were among the most important reports this week. They were generally worse than expected, but still reflect the months leading up to and including the war with Iraq as well as the negative effects of the bad winter weather. Car sales weren’t as good as expected, but were better than last month. The car manufacturers have likely borrowed substantially from this year’s sales with their free or very low financing incentives.
Consumer confidence defied economists’ best guess as the number rebounded soundly to 81 from a revised low of 61.4 in March. The rising consumer confidence has not yet spilled over into the commercial side of the economy. The ISM Manufacturing index declined slightly lower to 45.4 from last months’ huge drop from 50.5 to 46.2. Manufacturers were clearly very pessimistic in the months leading up the war. But the GDP statistics do show that they are increasing their purchases of computers and technology – a good sign they are gaining confidence.
Perhaps the most important piece of good news for investors is that the President and the Congress are moving forward on meaningful tax reductions and incentives designed to stimulate corporate investment and job creation. It may be the final piece of the puzzle in getting this economy back on a 2.5 to 3% growth curve. The first sign of that growth will be steady stock market improvement as investors anticipate the recovery. The proof will come in corporate earnings and government statistics in the coming months. Finally, as managers feel more confident that the recovery is real and sustainable, they will begin hiring in earnest. We could see unemployment numbers declining by the fall and actual job creation within the next twelve months. Many if not all of the people who represent those ‘numbers’ will grow in confidence and optimism about their own futures and once again our economy will grow.