05 Dec 2003 Improvement In New Areas
This week we saw improvement on the government policy front. Yesterday, President Bush announced an end to the steel tariffs that have caused such noise from Europe andChina, as he announced that they had served their purpose. Generally any government policy that restricts free trade is bad, but when concerted foreign competitive practices cause whole-industry disruption in a target country and the jobs it provides, action may be warranted. But the questions are always complicated and heavily influenced by bias.
Depending upon whose view you read, the tariffs worked or they were not necessary. But the facts are the steel industry has consolidated, reduced over-capacity, labor union contracts have been renegotiated downward, and prices are rising due to both domestic demand and huge demand in China. Whether or not the ends justify the means, the industry IS healthier.
Perhaps the greatest benefit of the steel tariffs was that that they proved theU.S.was willing and able to act to protect not only free, but fair trade. Perhaps simply the threat of action in the future will be sufficient to stave off the most egregious of trade infractions and avoid the rancor among our trading partners. Bush said that theU.S.will monitor imports for any “surges that could unfairly damage” the industry. What happens with China on the textile front remains to be seen.
The unemployment rate unexpectedly fell in November to its lowest level in nine months. The service economy also added 57,000 additional jobs for the fourth straight monthly gain. Additionally, October’s job growth report was revised upward from 126,000 to 137,000. Manufacturing jobs continue to be lost, but at a declining rate. This sector of the economy will likely continue to be difficult as overcapacity is reduced and as inevitable job loss to cheaper offshore competitors continues.
But the good news for manufacturing is that productivity growth continues to surprise even the most optimistic forecasters. U.S.workers can not compete on price with Chinese or other developing countries’ workers, but productivity and innovation can and will enable them to produce more and higher quality products. According to the Wall Street Journal, “since the economic recovery began in the fourth quarter of 2001, productivity has expanded at an annual rate of more than 5%, the fastest pace for a two-year period in more than 50 years and more than twice the rate that many economists believed sustainable at the height of the economic boom in the late 1990s.” In the short run, high productivity has kept many out of the job market, but longer term it enables theU.S.to maintain critical manufacturing and employ more workers as demand inevitably rises.
Another powerful benefit of rising productivity is that it increases the standards of living faster. The Wall Street Journal notes that “if the long-run trend of productivity growth is even just a half percentage point faster than the 2% many thought possible after the 1990s revival, the impact on the economy would be enormous.” The WSJ article goes on the state the Mr. Robert Solow, a Nobel Prizewinning economist at M.I.T. “figures that living standards would double in 28 years with productivity growth at 2.5%. At 2%, it would take seven additional years to double living standards. Economists at the Congressional Budget Office estimate that an extra half percentage point of productivity growth would boost total federal tax revenue, because incomes would be rising more swiftly, by nearly $780 billion between 2004 and 2013.”
Volatility in the price movements of individual stocks is increasing lately as prices rise. Investors show no mercy when companies fall short of earnings expectations, rightly or wrongly. Intel fell as much as 4% this morning following announcements of a write-down of assets they bought during the ‘bubble’ and because they failed to raise their fourth quarter sales forecast as much as some had hoped. The asset write-down should have surprised no one, but the sales number may be a bit more telling. Intel is the world’s leading chip seller. The fact that they do not see more growth than already predicted is likely bringing more optimistic investors back to earth. After all, the stock has already doubled since the end of the year.
Another example is the recent high flyer Jet Blue Airways, (OK, pun intended) dropped 20% today and has descended by 40% since reporting in October that it would miss consensus earnings. Since beginning its ascent in mid-March the airline stock was up a whopping 180%. Its decline is likely due more to year-end profit-taking than to long-term fundamental issues.
The market remains in a consolidation phase, where investors balance the reality of an improving economy with stock market valuations that may be too optimistic about the speed of the recovery. There will be volatility among specific stocks, but the general market continues to settle down in its bumpiness. As we begin a new year we will likely see continued price improvement in selected areas of the stock market where prices do not yet fully reflect performance expectations. But, even the big Dow stocks will likely continue to rise, albeit more gradually, as the abundant supply of new money eventually comes in from the sidelines.
Please Note:Last week’s Brief closed with a salute and special thanks to a few global leaders who bravely stand alongside the U.S. in a fight against world terrorism. One of our faithful readers pointed out the glaring omission of England’s Prime Minister Tony Blair; perhaps the bravest of them all. This man has been a staunch and steady ally ofU.S.policy in the fight against terrorism. By doing so, he places himself in political peril as he defies the popular mandate to take a more passive, arguably ineffective role in the war. He is a true hero and rare statesman in my book. And he indeed headed my list of leaders, but his name was inadvertently ‘selected and deleted’ in the editing process, as is all too easy to do with computer word processing. Please excuse the oversight and thank you again, Mr. Blair.