14 Feb 2003 Duct Tape and Plastic
High terror alerts across the nation have likely negatively impacted our economy of late, but the numbers from January look pretty good. TheU.S.consumer continues to support this economy to the amazement of many economists. Retail Sales excluding autos rose 1.3% last month, according to the Commerce Department. Building materials, higher gasoline prices, and higher prices on imported goods helped boost the index. Retail sales represent 30% of the U.S.economy.
Unemployment continues to improve, but slowly. Initial jobless claims for the first week in February fell by 14,000 applicants. Continuing claims dropped by 41,000 people. The rate of layoffs is declining and some employers, particularly homebuilders, are still hiring.
Numbers just released this morning show that business inventories rose for the eighth straight month in December as companies replenished their supplies to keep pace with demand. Businesses are managing their inventories exceptionally well as the time that stockpiles sit in warehouses is close to record lows. With demand expected to pick up throughout the year, production will likely have to rise significantly to keep up, helping the economy gain strength.
Industrial Production also rose more than expected in January and the most in six months. Also, the decline in jobs at producers last month was the smallest in six months. Much of the strength lies in auto production. Capacity utilization is also on the rise after reaching an 18 year low of 74% in December 2001. The utilization rate for January was 74.7%, slightly better than forecast.
Fed Chairman Alan Greenspan spent two days this week testifying before Congress about his views on the strength of theU.S.economy. He contended that the greatest obstacle to growth was the threat of war with Iraq. He said the economy doesn’t need a boost from tax cuts to grow this year and business spending will likely improve once U.S.tensions withIraqare resolved. He did, however, speak forcefully in favor of ending the double taxation of dividends “not as a short-term stimulus measure, but as a long-term good corporate tax policy and something which should add to the long-term flexibility and potential growth of the economy,” Greenspan said.
The rest of the world may be upside down as duct tape and plastic fly off hardware store shelves, but one was comforted to see that during the questions of Mr. Greenspan,Washingtonpolitics remain just as predictable as ever. While there is relative unanimity among both parties about Iraq, there is anything but harmony over the President’s tax proposals and his budget.
Republicans are anxious to get the economy going in order to keep their seats in Congress and in the White House. Mr. Greenspan seemed to suggest that their eagerness was overreaching; that the economy would recover without tax cuts. Greenspan is afraid, and indeed has history as his guide, that Congress will not cut spending sufficiently in the long-run to prevent the deficits that would occur with higher expenses and lower revenues.
Republicans argue that an expanding economy would actually produce higher tax revenues for the government. Econ 101 tells us; lower the price of anything in order to sell more of it. Indeed, when President Regan cut taxes dramatically in the 70’s the government’s tax receipts rose dramatically. Unfortunately for the tax-cut strategy (and Democrats have done a better job than Republicans in spinning the results toward their point of view), the Congress spent all and more of those increased tax revenues causing huge deficits, unopposed by President Regan.
Democrats can’t argue directly against tax cuts, because most folks don’t feel under-taxed, so they find themselves making the unaccustomed argument for fiscal responsibility. However, their passion for fiscal restraint would carry more weight if their position included significant spending cuts along with their progressive tax policy. This budget battle promises to be no less down-and-dirty than any in recent memory, but the market is much better equipped to deal with fiscal policy uncertainty than that of war.
Iraq and War
All eyes are onIraqnow, but the question of a possible war will likely be answered in a matter of days, if not hours. Opportunityis just beyond the smoke. The market has been exceptionally weak for the last few days. Investors know of the exceptional values in equities, but remain uninterested until there is some resolution inIraq. That resolution is near.