| BUSINESSWEEK ONLINE : NOVEMBER 1, 1999 ISSUE | ||||||||
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| BUSINESS OUTLOOK
U.S.: Why Oct. 28 Is Marked on Wall Street's Calendar The GDP data may show growth too hot for the Fed's liking You can't blame Wall Street for being a little nervous these days. The markets are beset by new worries about inflation and interest rates, all fueled by an overly rambunctious economy. Now for the bad news: It's not going to get better anytime soon. That's because there is still no sign that the economy is slowing down enough to take the Federal Reserve out of the picture. The newest evidence of that will come on Oct. 28, when the Commerce Dept. releases its data on third-quarter gross domestic product, complete with a five-year benchmark revision offering fresh insights into the impact of new technologies, along with other measurement enhancements. Right now, economists expect real GDP to have grown at an annual rate of 4% last quarter, well above the Fed's comfort zone, but growth is more likely to be above that than below. Moreover, analysts currently expect another 4% advance in the fourth quarter. To be sure, the September price indexes were skewed by one-time jolts, but pressures on costs and prices are building, as U.S. growth remains hot and as the global recovery picks up steam. Inflation in the early stages of production has picked up sharply, as manufacturing activity gears up in response to stronger exports (chart). A weaker dollar means that nonoil import prices are reversing course, after a three-year drop. And a two-year period of cheap raw materials is ending, even as pressure on labor costs remains high. The result: In the absence of an unlikely further acceleration in productivity growth, it's either upward pressure on prices and interest rates or downward pressure on profits. Either way, the stock market loses. BASED ON AVAILABLE MONTHLY DATA, the broad contours of the third-quarter GDP report are likely to look something like this: First of all, consumer spending appears to have grown only slightly slower than its beefy 4.8% pace racked up in the second quarter. Retail sales are the key here. September buying rose a modest 0.1% from August, but that reflected a slowdown in auto sales, from the highest annual rate since 1986, to a still booming pace. Excluding autos, sales increased a solid 0.6%, and overall buying in August was revised up substantially. Although higher gas prices lifted September receipts, furniture and appliance stores, department stores, and restaurants posted solid gains. Moreover, sales momentum remains strong heading into the all-important fourth quarter (chart). In addition to consumer strength, business investment in equipment appears to have posted another double-digit advance last quarter, similar to the previous quarter's 15% pace, although business construction likely fell. Despite Y2K concerns, the data show no sign that businesses are cutting back on tech spending. Equipment investment will be of special interest. For the first time, Commerce will include explicit estimates of outlays for business computer software. Economists expect the addition to add a couple of tenths of a percentage point annually to overall economic growth. The new benchmark revisions will be incorporated into the Labor Dept.'s productivity data due on Nov. 12. ANOTHER KEY AREA OF STRENGTH in the third quarter, and one that will carry over into the fourth, is inventory growth. Progressively smaller inventory gains have been a drag on GDP during the past year. Part of that slowdown was intentional, as businesses cut stocks in the face of weaker exports. But recently, the pickup in foreign demand, combined with no letup in domestic spending, appears to have taken inventory levels down too far relative to sales. In the past year, business inventories have grown 3.2%, while business sales have surged 9.2%, dropping the August ratio of stock levels to sales down to the lowest on record. Inventory rebuilding will add substantially to overall GDP growth this quarter and next. Some of those inventories will be coming from abroad, however. Despite a firming in export growth, imports continue to make foreign trade the biggest drag on GDP. The trade deficit narrowed a bit in August, to $24.1 billion, from $24.9 billion in July, but that is still far larger than the $21.6 billion averaged during the second quarter. Exports, up 3.2% in August, posted the largest monthly gain in nearly three years, but imports jumped 2%, pushed up partly by higher oil prices. The wider trade gap by itself subtracted about a percentage point from last quarter's GDP growth. FOREIGN TRADE IS FAST BECOMING a focal point in the outlooks for inflation and the financial markets. In particular, a world growth rebound is starting to reverse the 1997-98 period of reduced inflation pressures in the U.S. (chart). Prices of nonoil imports have stopped falling, and imported-car prices are even rising. Also, stronger foreign demand is lifting U.S. manufacturing, although it didn't look that way in September, as Hurricane Floyd depressed production. Output fell 0.2% from August, but excluding Floyd, it would have been up slightly, says the Federal Reserve. Last year, falling capacity utilization, caused by weak exports, and competition from cheap imports left factories with little or no pricing power. In addition, the global recovery is sure to siphon off some investment in U.S. assets now that the rest of the world looks like a safer place to put your money. The trouble is, the U.S. now needs an increasing amount of foreign capital to balance its record foreign obligations. That situation is likely to keep downward pressure on the dollar. Since July, the dollar is off 12% against the yen and 5% vs. the euro. The other area of weakness in third-quarter GDP will be housing, which is likely to post its first decline in two years. The more than one percentage-point increase in mortgage rates this year is taking a toll, although housing activity remains well supported by strong job markets and past stock market gains. Nevertheless, housing starts in September fell 3.2%, and new construction is 11% below its January peak. Moreover, builders in October said that housing-market conditions, while far from weak, were somewhat softer than they were in the summer. And mortgage applications to buy a home are also down since earlier this year. Housing is unlikely to add much if anything to fourth-quarter economic growth as well. The interesting twist in the outlook is the extent to which the recent sag in stock prices, and any further losses, will affect housing and consumer spending. After all, the aim of Fed policy is to cool off the economy through tighter financial conditions, and that goes beyond just higher interest rates. Given that stock market gains have been a major factor in the economy's rapid growth, any tightening that the stock market accomplishes by itself will mean less direct tightening from the Fed via higher rates. By JAMES C. COOPER & KATHLEEN MADIGAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS U.S.: Why Oct. 28 Is Marked on Wall Street's Calendar CHART: Export Growth Is Picking Up CHART: Shoppers Continue to Keep Retailers Busy CHART: Import Prices Are Turning Around INTERACT E-Mail to Business Week Online | |||
