Economists who focus on America’s rising national debt and trade deficits as reasons for pessimism are missing the mark, because the big economic picture is much more positive.
This story first appeared in the November 17, 2003 issue of WWD. Subscribe Today.
So said John Lipsky, chief economist at J.P. Morgan Chase & Co., who predicted “impressive” profit gains for U.S. companies as the U.S. economy rebounds to a 4 to 5 percent annual growth rate starting next year. The rebound will be driven by strong growth in economies around the world, stable prices, low interest rates and a boost in business confidence.
“We see above-trend growth emerging in the U.S.,” he said. “The pace of growth in household spending is likely to moderate and there will be greater strength in business spending. We expect [inflation] to stabilize somewhere between 1 and 2 percent and as a result there is no reason for the Fed to raise rates.”
Evidence of the good news could be seen in recently released figures showing that the country’s gross domestic product climbed 7.2 percent in the third quarter.
The growth has been stimulated by the Federal Reserve’s decision to keep interest rates down, as well as deficit spending by the Bush administration — giving the economy a level of stimulus that has “no historical equivalent,” according to Lipsky.
He marshalled figures to show that, during the recent recession and subsequent slow recovery, it was business, not consumers, that tightened spending. “It was the business sector that got overextended and had to correct in 2000 and 2001. The household sector wasn’t doing anything wrong.”
In fact, over the last four quarters consumer spending has accounted for the majority of GDP growth, said Lipsky. In the first half of this year, consumer spending grew at a rate between 2 and 3 percent, while business spending was virtually flat and government spending ticked up less than 1 percent.
Doom-and-gloom economists have been too quick to criticize American households for spending too much and saving too little, when, for the most part, households have kept their spending in line, said Lipsky. Since 1990, households have spent between 14 and 18 percent of their income on durable goods and housing, far less than in the Seventies, when expenditures peaked near 22 percent.
As for those who say that consumers are taking on more debt than they can afford, Lipsky said the burdens of debt service and other financial obligations for consumers have stabilized and interest rates are low. “Debt service as a percentage of income is around 13-1/2 percent. That’s not so bad.”
Five years of rising labor productivity have also helped consumer spending because as workers produce more efficiently they are getting paid more. Productivity growth is now running at an impressive 3 percent a year, Lipsky said. “Increased productivity translates to increases in real compensation, which produces increased demand.”
Given the healthy state of consumers, the next phase of economic growth will depend on industry, Lipsky said. While there are plenty of positive trends in the business sector —like a rebound in capital spending and an broad-based upward trend in profits — industry is still reluctant to invest in inventory or new workers, which is dampening growth.
During the downturn and subsequent slow recovery, businesses cut unit costs and boosted productivity. As a result, corporate profits as a percentage of GDP have rebounded to almost 7 percent of GDP, the highest level since the 1960s. And capital spending on information technology, equipment and software started to rebound in 2002 and ran at a 15 percent growth rate in the third quarter.
So if profits and capital investment are up, why haven’t economists observed a sustained uptick in employment?
The answer lies in workers’ increasing productivity. With productivity growth and GDP growth running neck-and-neck, there is no need for companies to hire new workers. When economic growth exceeds the 3 percent mark, probably sometime next year, companies will start hiring again, Lipsky predicted.
In short, said Lipsky, “all the elements are in place for a sustained and solid expansion.”