29 Jul 2005 Humble Confidence
The U.S. Economy continues to grow steadily. The Commerce Department reported today that the economy grew at a rate of 3.4% during the second quarter. It was the ninth straight quarter of growth exceeding 3%. We have to go all the way back to 1983 to find a longer growth streak over 3% and it lasted for 13 quarters, ending in March of 1986.
The early 80’s marked a dramatic resurgence of confidence in this country. President Ronald Reagan raised the spirits of Americans after a decade of humiliation and defeat. The country had suffered a stalemate and defeat inVietnam from 1962 through 1972, an Arab oil embargo in the mid-70’s, and the 444-day Iran hostage crisis ending January 20, 1981. The period was also characterized by massive Federal spending and the highest taxes on record, at the time. Mr. Reagan led the charge to ease the stranglehold of high taxes and burdensome Federal regulations. The economy responded in remarkable fashion.
Another characteristic of the early 80’s was runaway inflation. In August of 1979 Mr. Paul A. Volcker was appointed by President Carter to chair the Federal Reserve. He inherited dramatically risingU.S.inflation that would peak just below 14% in June of 1980. Under Volker, the Fed tightened and eased the Fed Funds rate targets to highs of 20% and lows of 9.5%, all in just one year – 1980. Dramatic times demanded dramatic steps. But it demonstrates a remarkable difference from Mr. Greenspan’s approach of a ‘measured’ pace of .25% each month, a current fed target at 3.25%, and inflation at 2.0%.
While Mr. Volker was heroic in his efforts to tame inflation, there was a more important force at work – confidence. Mr. Reagan’s pro-business, pro-productivity, and anti-tax-and-spend policies caused a dramatic shift in confidence at every level. The core inflation rate dropped from 13.6% in June of 1980 to 3% in July of 1983. As the economy began the growth spurt mentioned above inflation increased a couple of points to 5%, but it went no higher in the years that followed. Confidence spurred investment and that investment brought higher productivity, more jobs, and increased spending at all levels. The economy grew faster and longer than it ever had.
Today, we stand in the shadows of 9/11, theAfghanistan and Iraqi wars, the tech bubble collapse, and corporate malfeasance. But we are in so much better shape now than we were in the 80’s. Inflation is a mere fraction of what it was. Oil is not nearly so important to our economy as it was then and interest rates remain near historic lows. Productivity gains continue to be strong enabling business to produce more products more profitably. We see that the tax cuts and interest rate cuts of the last few years have stimulated further business investment, perpetuating the growth cycle.
And it looks like the strong and broad economic growth trend continues unabated. With roughly half of companies in the Dow Jones U.S. Total Market Index reporting, profits for the second quarter are up an average of 20% over last year. New leaders emerging from the pack include Internet services, Waste & Disposal Services, Oil Equipment and Services, Specialty Chemicals, and Home Furnishings.
As management reports numbers, an almost universal characteristic follows; a cautious outlook for the future. But hasn’t that been the case for many of the past cycles, in fact, nine of them? There seems to be a stronger breed of confidence today – more money and less mouth. Consumers feel comfortable investing their hard-earned money into homes and cars, but they don’t brag so much to those whom poll for confidence. Business leaders are crafting huge mergers and acquisitions and investing billions of dollars into new technology and plants, but they sound almost sheepish when they talk about the next quarter. In the late 90’s it was all hype. Today we are more humble, a sort of show-me economy. But quarter after quarter, the goods are delivered. Keep ‘em coming.