A disappointing "new factory orders" number for November: New Orders for Factory Goods Sank in Nov: The fall reflected a revised 2.5 percent drop in orders for expensive, long-lasting durable goods and a 0.2 percent drop in goods expected to last less than three years. The report showed a decline in orders in several categories in November. Demand for transportation equipment tumbled 1.3 percent and orders for computers and electronic products plunged 10.7 percent. Orders of non-defense capital goods excluding aircraft, which economists use to gauge business spending plans, fell 5.1 percent. One bright spot in the report was machinery orders, which climbed 2.1 percent. Excluding defense, orders were down 1.3 percent and excluding transportation, orders fell 1.5 percent......

The Conference Board shifts its forecast and turns way optimistic. Productivity growth of 3.6% forecast for 2004, trend labor force growth of 1.1%, an extra 0.5% growth in the labor force as discouraged workers start looking for jobs, and an 0.5% decline in the unemployment rate together add up to a forecast growth rate of 5.7%. They could very well be right. I can see it all on the supply side. I cannot quite see where all the demand will come from yet: 2004 Economic Forecast Best in 20 Years, Conference Board Reports: ...Revising its year-end economic forecast sharply upward, The Conference Board today projected that real GDP growth will hit 5.7% next year, making 2004 the best year economically in the last 20 years. The forecast, by Conference Board Chief Economist Gail Fosler, expects worker productivity, which set a 20-year record in the third quarter, to rise at a healthy 3.6% next year. That would follow a gain of 4.3% this year. The economic forecast is prepared for more than 2,500 corporate members of The Conference Board's global business network, based in 66 nations. "Growing business spending and continued strength in consumer spending are generating growth throughout the U.S....

The Financial Times's Neil Buckley reports a disappointing Christmas for U.S. retailers: FT.com Home US: US retailers are relying on a post-Christmas surge to hit their holiday sales targets after the pre-Christmas period fell short of expectations. Forecasters and retailers had looked forward to a sharp rebound this year, fuelled by a recovering economy, after a holiday season last year that was by some measures the worst for 30 years. But while higher-income shoppers have opened their wallets, bolstering upmarket retailers' sales, lower-income shoppers have remained cautious. Another factor skewing the results has been rapid growth in gift cards and certificates, estimated to account for 8-10 per cent of holiday sales this year. Retailers book revenues from these when they are redeemed by their recipients, not when they are first sold. Wal-Mart, the world's biggest retailer, said on Friday that a rush in the days before Christmas had not been enough to lift monthly same-store sales growth, from stores open at least a year, above the low end of its 3-5 per cent forecast......

Durables orders hit a rough spot: Durables Orders Plunge Unexpectedly (washingtonpost.com): New orders for long-lasting U.S. manufactured goods plunged unexpectedly in November, falling at the steepest rate in more than a year across a broad range of categories, a government report said on Wednesday. The Commerce Department said orders fell 3.1 percent to a seasonally adjusted $180.07 billion -- defying Wall Street economists' expectations for a 0.8 percent rise. It was the biggest monthly orders decline since a 6 percent tumble in September 2002 and followed a revised 4 percent increase in October. Every single category of durable goods suffered weaker demand in November, with orders for everything from computers and aircraft to new cars and defense goods falling. The category the Commerce Department calls non-defense capital goods excluding aircraft orders, which is seen as a proxy for business spending plans, fell 5.9 percent to a seasonally adjusted $55.59 billion. It was the biggest decline in this segment in more than 1-1/2 years since a 7.8 percent fall in March 2002... I can understand producer durables falling. But consumer durables?...

More on the Walmart Index: When Paycheck Is Low, Discount Retailers Have Pull: Living from paycheck to paycheck is the norm in the United States, economists say, and Wal-Mart's cash registers offer some proof of that. For more than a year, the retailer says, it has detected spikes in sales twice a month, around the 1st and the 15th, which is about the time that many people are paid. Visits to Wal-Marts around the country last week, at the height of the holiday shopping season, found many shoppers feeling squeezed - the Murphys on Long Island, the Dukes family in Georgia, the Lawrences and the Olsons near Seattle, and others as well. ''For many Americans, especially those with children who are living paycheck to paycheck, Christmas is seen as a time of financial crisis," said Stephen Brobeck, executive director of the Consumer Federation of America, an advocacy and education organization in Washington. "The group has grown as the result of rising unemployment and increasing consumer debt." Though there are some signs that the economy is healing - in the form of bigger Wall Street bonuses, for example, and increasing corporate profits - income has remained mostly flat for many workers,...

The Wal-Mart indicator is not very happy: FT.com Home US: Wal-Mart warned on Monday that sales were still tracking at the low end of its target range for December, in the latest sign that holiday retail sales in the US could be lacklustre. Forecasters and retailers had been looking for a sharp rebound in sales from last Christmas, when, by some measures, sales growth was the slowest for 30 years. The National Retail Federation, the industry lobby group, forecast total holiday sales would increase 5.7 per cent, year on year - the strongest increase since 1999 - compared with only a 2.2 per cent gain last year. It said on Monday it was sticking to its forecast. But Wal-Mart, the world's biggest retailer, which accounts for about 8 per cent of non-automotive retail sales in the US, warned for the second week running that sales from stores open at least a year were still towards the low end of its 3-5 per cent projected range. As in the previous week, it said fewer people visited its stores than in the same week last year, although average purchase sizes were up.......

The Financial Times's Amy Yee covers the Wal-Mart index: FT.com Home UK: Wal-Mart dampened hopes for strong holiday sales as it announced expectations that US December same-store sales growth would be at the low end of a 3-5 per cent growth forecast. In a weekly sales summary, the world's largest retailer said more consumers were delaying holiday shopping and buying gift cards, which are not recorded as revenue when purchased. Richard Hastings, analyst at Bernard Sands, said: "Wal-Mart shoppers are a huge aggregation of American society. The sales reflect that there are a lot of households insufficiently funded for the future," said Mr Hastings. "If you're an observer, you need to be very worried about this." Wal-Mart said that a decline in traffic reflected a consumer trend to shop later in the month. Sales were strongest in the south-east and mid-Atlantic regions. Wal-Mart accounts for about 8 per cent of US retail sales, excluding cars, making it an important barometer of consumer behaviour......

*Sigh*: CBS News | Consumer Confidence Slips | December 12, 2003 12:15:47: Consumers have turned more cautious after deciding that all the talk of an improving U.S. economy may still be just so much hot air, according to researchers at the University of Michigan. The consumer sentiment index fell Friday to a reading of 89.6 in early December from 93.7 in November. The decline was unexpected. The consensus forecast of Wall Street economists was for sentiment to improve to 95.6. Consumer sentiment has risen sharply since hitting a 10-year low of 77.6 in March. However, consumers cited fewer gains in wages as the primary reason for concern about their personal financial situation in early December. Growing impatience by consumers for their personal financial situation is typical after an initial surge in confidence tied to a recovering economy, researchers said. Consumers soon begin to wonder when the improving economy will translate into higher wages or a better job. "The data make it clear that consumers are counting on more rapid job growth in the months ahead, and without that growth in employment, confidence will quickly wane," the University of Michigan research team said. Let's hope this doesn't have much depressing effect on...

The shape of consumer demand this Christmas is still very unclear: Holiday retail sales expected to be jolly, not jubilant. - Nov. 28, 2003: ..."The consumer is jittery," said Hastings of Bernard Sands. "Rising debt levels, inflation and higher gasoline prices are all real threats and a drag on spending." Despite signs of a pickup in the economy and an improving labor market, consumers don't appear to be feeling the Yuletide cheer. "The economy still has to prove itself and create millions of new jobs," Hastings said. "The consumer is excessively dependent on all forms of credit for spending." The Conference Board in a survey Monday said U.S. households on average are expected to spend $455 on gifts this year, down 5 percent from 2002. "The 5 percent drop is shocking," said Delos Smith, economist with the Conference Board, a New York-based business research group. "It indicates that perhaps the consumer tax rebate stimulus that benefited retailers during the back-to-school season has petered out." Additionally, a survey from the Consumer Federation of America and the Credit Union National Association said 34 percent of consumers polled said they would spend less during the holidays this year compared to last year. Wal-Mart...

The Christmas shopping season has started, with mixed expectations: Retailers Usher in the Holiday Season: ...Stores have steeled themselves for a shopping letdown, with inventories that average 7 percent below last year's levels. Merchants like Sears, Roebuck and Co., Staples, K-B Toys, and several major mall operators reported that traffic and business as of Friday afternoon were at least as healthy as a year ago. No must-have item has emerged this season, although the best sellers in toys include Fisher-Price's Hokey Pokey Elmo, Spin Master's Mighty Beanz collectible plastic toys, MGA Entertainment's Bratz dolls and Mattel's Hot Wheels T-Wrecks playset. Michael Niemira, vice president of Bank of Tokyo-Mitsubishi Ltd., predicted a sales gain of 4.5 percent for the November-December period, the best performance since 1999, when the tally rose 5.4 percent. He based the estimate on sales from stores open at least a year, considered the best indicator of a retailer's health. Last holiday season's results were unchanged from 2001. The Washington-based National Retail Federation projected total holiday sales to rise 5.7 percent to $217.4 billion....

The Economist's Buttonwood Tree turns out to be a bear in disguise. Who'd a thunk it? Economist.com | The Buttonwood column: ...investors sense a chill beneath the warm glow of the numbers. One cold wind blowing across this particular recovery is that Americans are up to their necks in debt. With short-term interest rates at a 45-year low, households are spending some 13% of their disposable income on servicing their debts—a higher number even than in the sharp recession of the early 1980s, when the Federal funds rate topped 13%. How much longer can they carry on spending at this rate, let alone increase it? If they don't, then someone else will have to spend on their behalf. The government, perhaps? The Bush administration has turned a budget surplus of 2.4% of GDP into a deficit that official numbers say will amount to 4.3% of GDP next year. Not much room, in other words, to raise spending. Nor do American companies have oodles of money to play with. For all the talk of restructuring, they continue to increase their borrowing, though at least a slowdown in the rate at which they borrow and better profitability mean that their dreadful financial...

The NABE raises its forecast of economic growth for 2004: Yahoo! News - Economists Predict Strong Growth in '04 : ...a NABE forecasting panel predicting the jobless rate will average 5.8 percent in 2004, down from 6 percent currently. The forecasting panel saw payroll employment rising by 1.1 percent, or about 1.3 million workers, not enough to replace the 2.3 million jobs that have been lost since Bush took office in January 2001. While Democratic opponents are expected to point to weak job growth as a sign of Bush economic failures, the White House is apt to contend that the stronger economic growth is an indication that the president's tax cuts are starting to work. The NABE outlook, assembled by a panel of 28 forecasters from various industries, predicted that the overall economy, as measured by the gross domestic product, or GDP (news - web sites), will grow by 4.5 percent in 2004......

I do not understand Morgan Stanley's Richard Berner: Morgan Stanley: ...The output gap is the difference, in percentage points, between the level of potential and actual GDP, and as such measures economic slack.  It is a more comprehensive measure of the gap between actual and potential output than the factory utilization rate, which covers only about one-fifth of economic activity. Although many factors determine inflation — including inflation expectations, supply and demand shocks, and unit costs — other things equal, this slack in the economy tends to depress price change.  Currently, the output gap is wide; three years of subpar growth have opened up the gap to about 2% (that it is not wider reflects our belief that growth outstripped its potential in the 1990s boom, pushing the gap into positive territory, and the fact that the recent recession was the mildest in postwar history)... But... But... But... if output was well above potential in the mid- and late-1990s, why wasn't inflation rising faster? "Output above potential" has to mean strong upward pressure on the rates of increase of wages and prices, or it means nothing at all. And if the economy was roughly at or slightly above potential in the...

Good news on residential construction: Housing starts explode, set fastest pace since '86 - Nov. 19, 2003: New home construction in the United States accelerated in October to the fastest pace in nearly 18 years, the government said Wednesday, defying Wall Street forecasts for a slowdown. And the ever-rising flood of new homes appeared to be supported by demand, some economists said, indicating home prices were unlikely to be artificially inflated into a dangerous "bubble." The Commerce Department said the pace of housing starts rose 2.9 percent to a seasonally adjusted annual rate of 1.96 million units, after rising a revised 4 percent to 1.91 million units in September. Economists, on average, expected housing starts to fall to a 1.85 million-unit pace, according to Briefing.com......

Good news on inflation--since we're no longer worried about deflation, that is: Consumer prices flat in October - Nov. 18, 2003: ...The Labor Department reported that the consumer price index (CPI), a broad measure of prices paid by consumers, was flat in October after rising 0.3 percent in September. Economists, on average, expected CPI to rise 0.1 percent, according to Briefing.com. Excluding volatile food and energy prices, the so-called "core" CPI, rose 0.2 percent, after rising 0.1 percent in September. Economists expected core CPI to rise 0.1 percent, according to Briefing.com. U.S. stock market futures had little reaction to the report, pointing to a positive opening on Wall Street. Treasury bond prices rose. The report seemed unlikely to change the Federal Reserve's view that inflation is a distant threat to the economy, and it could support fears of a continued slowdown in consumer inflation......

When industrial capacity utilization--as estimated by the Federal Reserve Board--falls one percentage point below its average of 82%, real GDP falls about 0.6 percentage points relative to the economy's productive potential. The industrial sector is a cyclically-sensitive one, and its relative cyclical movements are more than half again as great as those of the economy as a whole. We can use this statistical relationship to get an idea of the relative movements of real GDP and the American economy's productive potential over the past generation and a half: The naked eye, gazing at this figure, can easily discern two things: The acceleration in the rate of GDP growth in the mid-1990s as the technological revolutions in information and communications technology reach critical mass and significantly affect the growth rate of the economy's productive potential. The two great shortfalls of output relative to potential in the past generation and a half--the Volcker disinflation recession of 1980-1983 and the current shortfall of output relative to potential--are of roughly similar magnitude. I remember the 1980-1083 Volcker disinflation. This current episode--although the shortfall in capacity utilization and in output relative to potential is as great and has gone on for as long--does not feel...

The Economic Policy Institute plots the Federal Reserve's capacity utilization index--how far the U.S. economy is below its productive capacity. By this measure, the total amount of idled economic capacity as a result of the current recession is already larger (as a percent of potential output) than in any post-WWII recession save 1981-1984--and we are rapidly closing in on that one as well: Economic Snapshots: ...There remains a lot of slack in the U.S. economy. One measure of economic slack is the capacity utilization rate, tracked by the Federal Reserve, which gauges the degree of slack in capital equipment in the U.S. economy. This provides a measure of how much of the economy's potential productive capacity is in use in a given quarter. Full capacity generally occurs before this index reaches 100. The average capacity utilization rate in the U.S. economy since 1967 is 81.6%. Of course, this measure of business cycle performance is a measure of business cycle performance: one principal reason that capacity utilization is so low is that the economy's productive potential is growing so fast as businesses take advantage of the steep and ongoing fall in the price of information technology capital....

The Economist appears to think that the American stock market is overvalued: Economist.com | America's business recovery: ...Although executives now feel under less market pressure since the discrediting of the Wall Street sell-side analysts who pushed them to have ever-shorter time-horizons, they still hear the market's call. And the current stockmarket rally has pushed the Dow Jones Industrial Average back towards 10,000, where it last stood in May 2002. As investors' expectations about future profits growth are inflated by rising share prices, a "natural pressure build"?, says Jim Andrews of the Boston Consulting Group. In lean times, says Mr Andrews, firms tend to invest fewer of their R&D dollars in new "breakthrough"? products or services. Their spending is focused instead on maintaining the competitiveness of existing products. By its nature, restructuring diminishes future opportunities for growth. This makes the current expectations of investors in American shares look all the more unrealistic. Analysts are forecasting that corporate profits will grow by some 11% a year for the next five years. But the long-run performance among S&P 500 firms is only 7% a year. Few of America's top managers, however, yet seem to be in a mood to take on the kind...

The Economic Policy Institute has a nice piece on understanding the severity of the current labor slump......

A couple of pieces of news that I thought would be good turn out to be a little bit worse than I was expecting: Rapid City Journal: Serving Rapid City South Dakota: America's shoppers tightened their belts for the second straight month in October, and prices at the wholesale level shot up by 0.8 percent -- the largest increase in seven months, the government reported Friday. The back-to-back declines in retail sales -- they fell by 0.3 percent last month and 0.4 percent in September -- came after consumers went on a shopping spree during the summer, the Commerce Department reported. Economists had predicted the hot pace could not be sustained.... The rise in wholesale prices was much larger than the 0.2 percent rise that economists were forecasting. October's jump...reflected sharply higher prices for food, especially for beef and veal, as well as car and truck prices as generous incentives were scaled back. And, the Federal Reserve reported that industrial production rose by 0.2 percent in October, down from a 0.5 percent gain in September. October's increase was half the size of the 0.4 percent increase that economists were calling for......

WalMart doesn't seem to have seen the same third-quarter spending boom that the NIPA estimates did, which is quite strange. Something seems to be wrong with our collective visualization of the Cosmic All: Forbes.com: Wal-Mart dumps cold water on U.S. economic bulls: CHICAGO, Nov 13 (Reuters) - Economists and politicians giddy about prospects for U.S. economic growth got a dousing of cold water on Thursday from Wal-Mart Stores Inc.(nyse: WMT - news - people), the world's largest company. The retailer -- which taps directly into the psyche of the U.S. consumer -- gave a downbeat economic outlook that contrasted with reams of recent data, and bluntly suggested that many of its shoppers are barely making ends meet. Customers continue to buy the cheapest items in any given category -- a sign that household budgets remain tight, Lee Scott, Wal-Mart chief executive officer, said on a recorded message. Buyers are "timing their expenditures around the receipt of their paychecks, indicating liquidity issues," Scott said. "I don't think consumer spending is slowing, but I also don't see the strength that many of you in the investment community appear to see," Scott said. Wal-Mart's sober outlook came after the U.S. economy enjoyed its...

Stephen Roach is still gloomy. I'm still gloomy about unemployment, but it's hard to be gloomy about other aspects of the economy given the very strong productivity growth trend: Stephen Roach: ...As of October 2003, the private job count was still down nearly 1% from the level prevailing at the official cyclical turning point in November 2001. By my reckoning, that still works out to a cyclical shortfall of close to 7 million jobs — the number of Americans who would have been at work in the private sector had the current hiring recovery conformed to the cyclical norms of the past. In short, while the US appears to have transitioned from a jobless to a job-short recovery, it’s a real stretch to argue that hiring has now reached the critical mass that sparks cumulative cyclical increases in the real economy.... in my view, there are some equally critical differences between the state of today’s US economy and conditions prevailing in the upturn of the early 1990s — differences that challenge the notion that a comparable transition is about to begin. That’s especially true of consumer balance sheets: Today, household sector debt stands in excess of 80% of GDP, well...

The always-wise John Berry of the Washington Post peers into his crystal ball and tries to gauge the future of the economy: Greenspan Sees Job Market Poised for Growth (washingtonpost.com): ...Many forecasters, such as Joe Liro of Stone & McCarthy, a financial markets research firm, currently are predicting that economic growth will run at about a 4 percent annual rate in 2004 with productivity slowing to what Liro called "a still remarkable 3 percent rate or so." That combination of economic and productivity growth would be consistent with some job creation, but with the working age population expanding about 1 percent a year, there would not necessarily be enough jobs added to bring down the nation's 6.1 percent unemployment rate. In his speech, Greenspan said that in the past, during recoveries following recessions, the Fed has had "to move aggressively" to raise interest rates to keep inflation contained. But this time inflation "has been running only a little more than 1 percent over the last year, and firms exhibit scant evidence that they are gaining appreciable pricing power despite the pickup in the pace of economic growth. . . . In these circumstances, monetary policy is able to be more...

Alan Greenspan gives a nuanced view of the current economic situation. He expects the economy to grow at a rate of between 3.5 and 4.0 percent over the next year or so, and expects employment growth to pick up (although probably does not expect significant falls in the unemployment rate): Greenspan: Odds favor job growth, worries about deficit - Nov. 6, 2003: Greenspan... said "the odds ... increasingly favor a revival in job creation," which wouldn't come a moment too soon for the health of the broader economy. But, he says, if employment does not start to grow, a return of slow-growth stagnation is very possible: "Unless hiring picks up and layoffs ease, assuaging the latent job security fears of many of those currently employed, the share of income spent could decline, a development that would hamper the vigor of the expansion," the central bank chairman said. The large wedge being driven between output growth and slow or zero employment growth is the result of what is amazingly good news about productivity--but future news about productivity is unlikely to be as bright: Greenspan said the economy was able to grow in the third quarter at the fastest pace in nearly...

Notes for my talk today for the Berkeley Faculty Forum Lunch on the state of the business cycle....

A piece of good news for the fourth quarter: consumer demand may be easing off, but manufacturing production is accelerating: ISM manufacturing index surges - Nov. 3, 2003: NEW YORK (CNN/Money) - U.S. manufacturing activity accelerated in October, the nation's purchasing managers said Monday, in a report that surpassed Wall Street expectations. The Institute for Supply Management (ISM) said its index of manufacturing activity rose to 57 from 53.7 in September. It was the fourth straight month the ISM index was above 50, a number that indicates expansion in the sector. Economists, on average, expected the ISM index to rise to 55.8, according to Briefing.com. "This is the best report that we have seen in quite some time in terms of the overall strength of manufacturing," said Norbert Ore, chair of the ISM Manufacturing Business Survey Committee. "The picture continues to improve, and it appears that manufacturing will finish 2003 on a very positive note, assuming the recent trend continues."......

The Angry Bear has some very nice and interesting thoughts about last summer's economic boom: : Explaining the GDP BoomFurther insight into yesterday’s big GDP numbers was provided by the release this morning of the September personal income and spending data by the BEA. Both income and spending were sharply lower in September compared to August. The reason? Overwhelmingly, it was because of the end of the one-time tax rebates sent out over the summer. In the graph below, you can see the big bump in both disposable income and consumer spending in July and August, which was almost entirely due to the tax rebates.What does this mean? Three things.First: this provides strong evidence that the huge increase in GDP last quarter, which was powered largely by consumer spending, was largely due to the tax cut. Good old fashioned Keynesianism, as AB pointed out. The mortgage refinancing boom helped some, too, but the lion’s share of the credit goes to the tax cuts.Second: this suggests that last quarter’s GDP figures were an aberration. The fourth quarter will most likely not be nearly as good, since the tax rebates have now been spent and their impact on the economy is pretty...

A piece of disappointing news for growth in the fourth quarter: Consumer spending dips 0.3% in September - Oct. 31, 2003: The Commerce Department said personal income rose 0.3 percent after rising a revised 0.3 percent in August. Economists, on average, expected it to rise 0.2 percent, according to Briefing.com. Spending by consumers, which accounts for about 70 percent of the nation's economic activity, fell 0.3 percent after rising a revised 1.1 percent in August. Economists, on average, expected spending to fall 0.1 percent... That's a big enough piece of bad news to cause me to take a full percentage point off my personal estimate of the fourth quarter GDP growth rate......

Today's Gross Domestic Product News Release tells us that the preliminary estimate is that real GDP grew in the third quarter at a 7.2% annual rate. In addition, equipment investment grew at a 15.4% annual rate--a sign that the long pause in business investment may finally be over....

About five hours from now the Department of Commerce is going to release its first early estimate of the seasonally-adjusted pace of economic growth in the third, summer quarter of 2003. It will be a big number--growth at an annual rate of 6.0% per year or more. [UPDATE: It turned out to be 7.2%] Sometime in the following week, the Labor Department will combine that estimate of the rate of economic growth with its own estimates that the number of hours worked in America fell at an annual rate of 0.7% per year during the summer. It will then announce an estimate of the annual rate of productivity growth over the summer--something close to a 7.0% annual rate. [UPDATE: My current guess is 8.0%] How can such strong output growth coexist with such lousy employment news? It is this year's great economic data mystery. Everyone believes that it cannot last. Either (i) firms will find themselves unable to meet rapidly-growing demand with their current labor force, and will start hiring at a furious pace, rapidly expanding employment; or (ii) households will take a look at their less-than-certain employment prospects, cut back on spending, and the pace of demand growth will...

Morgan Stanley's Richard Berner believes that we can finally see a sustainable rapid-growth recovery ahead. He thinks real GDP growth over the next year and a half is as likely to be above 4 percent per year as below it. If he is right, we might finally see the unemployment rate start to drop below 6 percent... Morgan Stanley: ...It was fun while it lasted, but US final demand is cooling from a sizzling 7% summer pace, and many believe that this deceleration is the prelude to a more lasting slowdown in growth. After all, the pessimists believe, massive summer tax cuts and a record mortgage refinancing boom largely fueled the advance; with both of these sources of stimulus fading and scant job gains to recharge income, the payback could be significant and lasting. I disagree. To be sure, the summer demand surge ran at an unsustainable clip, but in my view the inevitable deceleration will be short-lived. That's because production is finally scrambling to catch up with demand in time-honored cyclical fashion. In turn, rising production will begin to generate jobs, and the acceleration in output will lift growth in capital spending. If anything, I see the risks to...

Good news from the transportation industries: WSJ.com - As Volumes Pick Up, Shippers See Economy Gaining Traction: ...For the first time since the economy began slowing three years ago, many of the country's largest transportation companies are seeing signs of a broad-based recovery that appears to have staying power. The turnaround is coming in sectors that handle the vast bulk of goods transported domestically: railroads, trucking and package delivery. Their performance is considered a leading indicator of future economic growth, because many of the items they carry are used as raw materials in industrial production and for replenishing inventories. The companies, which closely monitor their biggest customers' own future expectations, say they are seeing increased demand across a broad swath of industries, from manufacturing and chemicals to retailing and lumber......

The Wall Street Journal's Greg Ip reports on mixed macroeconomic news: WSJ.com - Leading-Indicators Index Falls 0.2%: ...The Conference Board said its index of leading indicators fell 0.2% in September, the first decline in four months. "The economy is improving ... although the road ahead will likely remain bumpy," said Ken Goldstein, an economist for the independent business-research group. Economists estimate the economy grew at a blistering 6.1% annual rate in the third quarter ended Sept. 30, according to a survey by Macroeconomic Advisers LLC, a St. Louis forecasting firm. That would be the fastest quarterly pace in almost four years. Macroeconomic Advisers estimates the economy grew 6.9%. However, most of the expansion in economic activity took place in July and August, when the effect of tax cuts and the mortgage-refinancing boom were strongest. There are signs consumer spending cooled in September as the impact of mortgage refinancing and tax cuts faded. The Conference Board said six of the 10 indicators in its index declined, led by the money supply, and the relationship between long-term and short-term interest rates. Positive contributors were the manufacturing workweek and stock prices. Economists see growth decelerating to a still-respectable 3.8% fourth-quarter rate, according to...

Louis Uchitelle frames the issue the wrong way around: there is no such thing as "overinvestment," there is only too little aggregate demand. If you think that there is "overinvestment," dropping the interest rate will cure you of that belief. At least, it will until you hit a liquidity trap... But it looks like that is no longer a dangerous possibility. Overcapacity Stalls New Jobs: But another dynamic closer to home is weighing on job creation -- the slow process of working through a glut of boom-era investment that continues to litter the economy with underused factories. Procter & Gamble, for example, has been dumping its weakest brands and the plants that produce them. At its Ivorydale industrial complex here, in Procter's hometown, the company has sold factories that make Crisco shortening, Olean fat substitute and Ivory soap to three manufacturers, each with plans for squeezing efficiencies from the operations. Hiring more workers is the last item on their agendas. "As long as there is extra capacity available in manufacturing, there is going to be room to move work around among companies without having to add workers," said Thomas A. Kochan, a labor and management expert at the Sloan School...

Good industrial production news, but overall the news is not as good as I hoped: WSJ.com - Economic Recovery Gains Strength: ...the Federal Reserve said industrial production rose a solid 0.4% in September, a turnaround from a drop of 0.1% in August. The consumer-price index... excluding food and energy prices... rose only 0.1%, suggesting that the downward pressure on prices is still a concern for the Fed. Prices are up a modest 1.2% year to year, a 37-year low. Low inflation likely means the key short-term interest rate will be kept at 1% when the Fed meets next, on Oct. 28.... The positive data are consistent with the view of top corporate executives that the economy is rebounding. A new survey by the Business Roundtable, whose members are chief executive officers from the largest U.S. companies, estimates that U.S. gross domestic product will grow at a 3.3% rate in the fourth quarter... Sigh. I was hoping for a 4% growth rate in the fourth quarter....

More good economic news--although whether the good news is mostly about productivity, mostly about exports, or mostly about domestic investment spending is not clear: WSJ.com - Intel's Earnings Soar With PC Chip Demand: Intel Corp.'s recovery kicked into a higher gear in the third quarter, as the big chip maker reaped big benefits from the rise in mobile computing and strong demand in Asia. The Santa Clara, Calif., company said net income more than doubled in the period ended Sept. 27, on revenue that rose 20% from the year-earlier period and record unit shipments of its microprocessor chips. Intel also forecast another healthy jump in sales for the fourth period, as well as further improvement in its already formidable gross profit margin. "It was an outstanding quarter," said Andy Bryant, Intel's chief financial officer......

Ben Bernanke tries to convince the markets that the Federal Reserve will not raise interest rates until the unemployment rate drops significantly: Fed's Bernanke commits to low interest rates - Oct. 14, 2003: WASHINGTON (Reuters) - The U.S. economy seems on track for a sustained period of expansion, but the Federal Reserve can keep interest rates low at least until signs emerge of a solid jobs market recovery, a top Fed official said Tuesday. "After several false starts, the economy is showing signs of sustained recovery," Fed Governor Ben Bernanke said in testimony prepared for delivery to the Senate Banking Committee. Still, Bernanke told the panel the Fed sees risks that already low inflation could drift lower, putting the central bank in a position to hold interest rates at a low level to foster a sustained recovery in the long-suffering U.S. jobs market. The panel was also to hear from Fed Vice Chairman Roger Ferguson, who has been tapped by President Bush for a fresh four-year term as the board's No. 2 official. In prepared remarks, Ferguson told the committee big technological advances had made the U.S. workforce more productive. "But faster productivity growth, despite its long-term benefits, has not...

Stephen Roach thinks that we have already seen the fastest growth the U.S. economy will see for quite a while. He's very smart, and very thoughtful: Morgan Stanley: ...In the case of the US, a significant portion of the current growth spurt appears to have borrowed from the future. At least, that's the verdict that can be taken from what we estimate to have been close to a 25% annualized growth in durable goods consumption in the two middle quarters of 2003 -- the sharpest back-to-back quarterly gains in this category since the early 1970s. With consumer durables now having risen to what we estimate is a record 11.4% share of real GDP in 3Q03, nearly two full percentage points above the 9.5% portion prevailing at the onset of the last recession in early 2001, there's little reason to believe that the recent surge represents a recouping of long-deferred, or pent-up, demand. Instead, it was probably more of an artificial boost reflecting the impacts of the recent tax cut, aggressive vehicles sales incentives, and the lagged effects of yet another surge of home mortgage refinancing activity. Inasmuch as durables are long-lasting items that are purchased at infrequent intervals, I would...

Updated forecasts from the Wall Street Journal forecast. It is interesting that 100% of upward revisions in forecasts over the past two months has been in expected productivity growth, and none has been in expected employment growth: WSJ.com - Consumers Give a Boost To Economists' Forecasts: The average forecast of the 53 economists who participated in The Wall Street Journal Online's economic-forecasting survey this month put growth for the third quarter at an inflation-adjusted annualized rate of 5%, up from the 4.7% rate they predicted in a September survey and from 3.6% in August. But while economists have been walking third-quarter expectations higher, they have largely left unchanged forecasts that growth will moderate in the current quarter and the first half of 2004. For early next year, they put growth in gross domestic product, the broadest measure of output in the economy, at just under a 4% rate. That is still considerably stronger than what was seen early this year. Second-quarter growth was at a 3.3% rate, while first-quarter growth was at a 1.4% rate. Many economists attributed the strength in consumer spending to the latest federal-tax reductions. Some economists said they were caught off-guard by the extent of the...

Morgan Stanley's Richard Berner and David Greenlaw continue to be optimistic about the U.S. business-cycle recovery over the next two years: Morgan Stanley: ...Moreover, many fear that sluggish growth will return once the impetus from the fiscal stimulus effective in July and mortgage refinancing fades.  Indeed, incoming signals have already turned mixed and fourth quarter demand growth likely will be weaker than the third, even with rising employment raising income prospects.  It was fun while it lasted, but in our view the adrenaline rush of the upswing in demand growth is over; now come strong but unspectacular gains in demand.  Yet a dip in August capital goods orders and shipments, a September decline in vehicle sales from hyper-elevated August levels, and softness in consumer sentiment and purchasing-manager surveys have all raised concerns that the deceleration might be long lasting.  We disagree.  To be sure, those hurdles will keep the sustainability debate alive.  But as we see it, a sustainable recovery remains the most likely outcome, as four factors assure that the demand side of the equation has more legs than commonly perceived.  First, pent-up demand for capital goods and hiring is rising as post-bubble headwinds are fading (see The Drivers...

Bad news about consumer confidence: Consumer confidence drops below expectations - Sep. 30, 2003: Consumer confidence in the U.S. economy dropped in September, a research group said Tuesday, weighed down by nagging worries about a weak job market. The Conference Board, a business research group based in New York, said its closely watched index of consumer confidence fell to 76.8 from a revised 81.7 in August. Economists, on average, expected confidence to fall to 80.5, according to Briefing.com. In addition, the Conference Board's "expectations" index, which measures how consumers feel about the future, fell to 88.4 from a revised 94.9 in August. The "present situation" index dropped to 59.5 from a revised 62. "The lack of improvement in labor market conditions continues to dampen consumers' spirits," said Lynn Franco, director of the Conference Board's Consumer Research Center. "Despite September's retreat, consumers remain cautiously optimistic about the outlook for the next six months. Consumer spending is likely to continue at or near current levels."......

OPEC flexes its muscles. I should redo the back-of-the-envelope calculations: what difference for the U.S. economy does it make if oil is $30 a barrel rather than $20 a barrel? Economist.com: BEFORE the regular meeting of the Organisation of Petroleum Exporting Countries (OPEC) in Vienna on Wednesday September 24th, most of the drama was provided by Hugo Chávez, the Venezuelan president, who opined that the Iraq representative should not have been at the get-together because he was an illegitimate stooge of American occupiers. If that is so, Ibrahim Bahr al-Uloum behaved very oddly. His bullish predictions that Iraq could produce at least 3.5m barrels per day (bpd) by 2005 seem to have been among the factors that persuaded the ten members of OPEC's quota system to approve a surprise production cut of 900,000 bpd, to 24.5m bpd. The effect of the cut was to send oil prices sharply higher. The futures price of West Texas Intermediate, the American benchmark, leapt by $1.06, to $28.18. Equities in America retreated on fears that a higher oil price could stymie the incipient economic recovery: the Dow Jones Industrial Average of 30 leading shares fell by 1.57% that day.... Some observers are also speculating...

Bad news (but not very bad news) about production: WSJ.com - Orders in August For Durable Goods Decreased 0.9%: The Commerce Department reported that U.S. manufacturers saw a 0.9% decline in orders for August from July for long-lasting durable goods such as cars, computers and household appliances, to a seasonally adjusted level of $173.3 billion. That followed solid gains during the two preceding months......

Bernanke's private inflation forecast: Fed's Bernanke sees drop in inflation - Sep. 22, 2003: Bernanke said, "The basic idea that inflation will remain tame and under control is a good message to take away, I don't really disagree with that. But what I'd like to point out is that there are some risks to the downside there, because in particular, even though the economy is growing pretty rapidly, there's a lot of slack still in the economy." "My forecast...is that inflation will actually fall even a little bit further from where it is today," he told a conference sponsored by the National Association of Federal Credit Unions......

It's not worth much because of the blackout, but here it is: Production Inches Higher, While Manufacturing Declines: Production at factories, mines and utilities increased 0.1 percent in August after rising 0.7 percent in July, more than previously stated, the Federal Reserve said. The report was aided by a 2.1 percent jump in computer equipment production, the biggest gain since July 2000. The results fell below the median forecast of a 0.3 percent gain in part because of a 0.1 percent decline in manufacturing, the first since April, after a blackout in the Northeast and Midwest crimped auto production, economists said. "I don't think this report undermines what we're seeing in terms of recovery for the rest of the economy," said Richard DeKaser, an economist at National City in Cleveland. "With inventories so low, there's a good case to be made for an uptick in production the rest of the year."...

A piece of not-so-good demand news, from John Labate of the Financial Times: FT.com Home US: Expectations of a strong rebound in the US economy were called into question on Friday with disappointing reports on retail sales and consumer attitudes. US retail sales rose in August, but more slowly than expected. Sales by retailers reached $319.2bn (euro 290bn, £200bn), a rise of 0.6 per cent from the previous month and 5.4 per cent from August 2002, according to the US Commerce Department. The top-line sales figure, however, was only about half of what economists had been expecting. The second surprise came with a report suggesting that consumer sentiment had edged lower in early September from August levels. The consumer sentiment index compiled by the University of Michigan fell in its preliminary September reading to 88.2, down from the final reading for August of 89.3. Economists had expected September to be above 90. The Michigan report's measure of current views on the economy and future expectations also dropped from August levels.... Analysts said the dip in consumer sentiment reflected concerns about the sluggish employment sector. Economists asked how strong consumer spending might remain in the months ahead, if the employment sector...

We used to have considerable confidence in Okun's law: that an extra one percentage point rise (or fall) in the unemployment rate over a year would reduce (or boost) that real GDP growth by an extra 2.5 percent over that year because a rising (or falling) unemployment rate would also be accompanied by a falling (rising) share of the population in the labor force and by falling (rapidly rising) productivity. Productivity would fall when the unemployment rate rose for two reasons: first, even when factories are not running at full capacity they still incur substantial setup and maintenance costs; second, even when there isn't enough work for them to do firms would rather hold onto skilled workers than watch them drift away and have to pay to train their replacements the next time the wheel of the business cycle turns. Things have been different, however, in this recession (and to a lesser extent in the preceding early-1990s recession. The standard relationship between output growth and hours worked has gone substantially awry. See that branch poking out of the scatter diagram on the left side? That's the most recent data. (The smaller twig pointing out below and to the left...

A labor market forecast from briefing.com: WSJ.com -- Reports from Briefing.com: The labor market remains in transition as the last six months of payroll declines are expected to turn into small gains over the coming months.  The dismal news from manufacturing continues with a 36th consecutive month of decline summing to 2.8 mln fewer workers.  Private service sector payrolls have been bouncing on either side of flat growth.  The monthly movement is volatile due to corporate cost cutting, strong labor productivity and an economy that's not generating a strong lift in aggregate demand.  The lagging unemployment rate reached a new 6.4% high in June and will continue to follow a path higher even as payrolls return to growth.  Hourly earnings are running at a 3% pace as compensation costs are of lesser concern given weak unit labor costs (compensation offset by productivity gains).  The workweek is a key indicator of labor demand and a leading indicator of payroll growth but shows no evidence of an impending upturn.  The labor market still shows no signs of tightening up but it lags the overall economy....

Still more good news on the global investment demand front: Forbes.com: Global chip sales up 2.9 pct M/M in July - WSTS: AMSTERDAM, Sept 1 (Reuters) - Global semiconductor sales were $12.905 billion in July, rising 2.9 percent from the previous month and 10.5 percent versus July 2002, a global industry group said on Monday. Sales in Japan jumped 4.8 percent from June, while sales in Asia Pacific were up 2.9 percent. In Europe they rose 2.3 percent and in Americas by one percent from June, the World Semiconductor Trade Statistics (WSTS) group said....

Andrea Hopkins of Forbes writes about expectations for faster U.S. growth: Forbes.com: U.S. recovery is here -- we mean it this time: ...Often burned but never shy, economic forecasters have ramped up predictions for growth for the rest of 2003 and into 2004, certain -- once again -- that America has turned the corner on the 2001 recession. "All the data's saying the same thing: this quarter is going to be a cracker," said Ram Bhagavatula, chief economist at Royal Bank of Scotland Financial Markets, predicting gross domestic product growth will hit a 6 percent to 7 percent annual rate this quarter. He's not alone. A raft of positive economic news in recent weeks has many economists hiking third-quarter growth forecasts as high as 7 percent -- more than double the 3.1 percent annual growth rate notched in the second quarter... And this leaves me looking at the labor market and scratching my head: if workers are becoming so much more productive so fast, why aren't firms hiring more of them. I have no special reason to doubt either the output or the work hours figures, but this business-cycle configuration is very, very unusual indeed......

Comment on James Stock and Mark Watson (2003), "Has the Business Cycle Changed?" (Forthcoming in the 2004 Monetary Policy and Uncertainty: Adapting to a Changing Economy (Kansas City: Federal Reserve Bank of Kansas City). James Stock and Mark Watson's paper challenges things that I thought I knew, and tells me that I am going to have to rethink a bunch of issues--going to have to mark my beliefs to market once again. To the extent that there has been a conventional wisdom among economic historians, the extraordinary moderation of the business cycle--the reduction in the size of swings in the unemployment rate, and in the variance of annual output growth--has been due to very important learning about how to better conduct monetary policy. Christina Romer has been the most powerful advocate of this line of narrative. And this has been what I have taught my students over the past several years. The founding of the Federal Reserve brought the possibility of an elastic currency, and of avoiding the great liquidity catastrophes that afflicted the U.S. in the late nineteenth century. The silver-agitation crises of the 1890s, the great crash of 1873 when British investors grew nervous about the "crony capitalism"...

Good news about consumer confidence as well: WSJ.com - Consumer Confidence Bounced Back in August: The Conference Board reported Tuesday that its consumer-confidence index rose to 81.3 in August from a revised 77 in July. The expectations index jumped to 94.4 from 86.3, while the index measuring attitudes on present conditions slipped to 61.6 from 63. Labor-market concerns continued to dominate. The share of consumers who found jobs "plentiful" inched up to 11.1% from 10.7%, but there was a far larger increase in those who said jobs were "hard to get" -- to 34.1% from 32.7%. In terms of expectations six months from now, 18% expected more jobs, up from 16.6%, while 18.6% expected fewer jobs down from 19.6%......

Good news this morning about spending on durables: New orders for durable goods in July were $174 billion, up 1.0% from June. Shipments were $181.4 billion, up 2.6% from June. And inventories were $263.9 billion, down 0.9% from last month......

Real investment in high-tech equipment has been running at a world-record pace for several quarters now. But what's different about this piece of good news is that demand is finally strong enough for capital-equipment producers like Intel to actually make some money: WSJ.com - Chip Maker Intel Raises Outlook for Sales, Margins: Intel Corp. raised its outlook for the third quarter, citing strength in its personal-computer microprocessor business, and said its profit margins will be better than previously forecast. In early trading Friday, shares of Intel were up $2.08, or 7.9%, to $28.47 on the Nasdaq Stock Market. Speaking in a conference call, Chief Financial Officer Andy Bryant said the company raised its revenue targets after experiencing higher-than-expected microprocessor shipments in July and the first couple of weeks of August. He said that microprocessors, chipsets and motherboards are "unexpectedly strong" across all geographic regions and channels. He noted that customer inventories remain lean, signaling that customers' products are also selling well. Intel felt that this change was "big enough" that it had to tell investors about it, he said. Intel made its announcement two weeks ahead of its regularly scheduled midquarter update, which is slated for Sept. 4......

By contrast, Morgan Stanley is more than bullish on America. It is positively aurochish on the likely rate of economic growth in the current quarter. Let me give the mike to Richard Berner: Morgan Stanley: ...There's no mistaking the gathering momentum in U.S. economic activity, however.  Incoming data depict a rapidly accelerating economy: From just 1.4% in Q1, it now appears that growth could touch 5% in the current quarter.  And the strength is broadly-based, suggesting genuine staying power.  Upside surprises in both consumer and business capital spending have paced the improvement in demand.  Responding to tax cuts and the ongoing benefits from lower debt service costs, consumers stepped up spending sufficiently on vehicles and a variety of soft and hard goods in July so that even modest gains in August and September would likely yield a 4½% real pace in the third quarter.  Fuelled by rising profitability, a broad-based replacement cycle, and stepped-up tax incentives for investment, businesses appear to be committing to increased capital spending.  While third-quarter data aren't yet available, sharp June gains in shipments and, more important, in advance bookings, hint at real gains in the high single digits... A 5% annual real GDP growth rate...

Corporate insiders appear to be selling, not buying, their companies' stock. At the very least, this tells us that insiders do not think the stock of companies they manage is a particularly good investment. WSJ.com - Insiders' Moves in Face Of Rally Spark Concern: The economy and the stock market may be perking up, but the nation's corporate executives aren't yet buying into the recovery. In fact, they are selling their company's stock at levels not seen in more than a year -- a potentially ominous sign for the market in the months ahead. Common Wall Street wisdom, and recent history, hold that the sentiment of company insiders when it comes to their own stock is an unusually accurate indicator of future market performance. Executives, after all, are among the best-informed investors when it comes to their companies, giving their buying and selling significant predictive value. Their recent predictions aren't very encouraging. According to Thomson Financial, the dollar ratio of insider transactions in July was $32.21 in sales for every $1 in purchases, the highest monthly reading since May 2001. July marked the third consecutive month the ratio topped 20 to 1, a bearish level that hasn't been sustained for...

A surprisingly large jump in industrial production in July--especially considering that manufacturing employment fell by half a percent, by 71,000 in July: from 14.68 to 14.61 million: FT.com Home US: US industrial production rose at its fastest pace since January last month, adding to the evidence that economic growth is accelerating. Output rose by a robust 0.5 per cent over the month, its third consecutive gain and well ahead of expectations of a 0.2 per cent rise. The figure was boosted by a steep rise in utility output - which economists said reflected the greater use of air conditioning - and strong car sales, which have been helped by a new round of incentives. But the rise in output was relatively broad-based, with a particularly strong 4.2 per cent rise in home electronics... "This will increase confidence that we have a recovery on our hands," said Mark Cliffe, chief economist at ING. "There is now a fighting chance of getting growth of above 4 per cent by the end of the year." It's only one month, and manufacturing is not the same thing as industrial production, but it's interesting to see industrial production rising at a 6% per year rate...

More bad news about the pace of economic growth in the euro zone. It leaves me, once more, scratching my head and trying to figure out what the ECB thinks that it is doing. WSJ.com - German Economy Shrank 0.1% In Quarter, Confirming Recession: FRANKFURT -- The euro zone, collectively the world's second-largest economy, stagnated during the second quarter, highlighting its relative weakness against the U.S. and even perennial laggard Japan. Although economists say the worst may be over, several major European nations -- Germany, Italy and the Netherlands -- saw their economies shrink, the European Union's statistics agency said. For Germany, it was the third straight quarter of contraction; Europe's largest economy is in its second recession in two years......

Some more two-year centered moving averages since 1960: this time it's nonfarm business real output and nonfarm business total hours worked. Once again (and unsurprisingly) we are outside the bounds of previous experience in the modern American economy: The little twig on the left side of the figure shows the moving-average data for 2000-2002. Never in any two-year period in the modern American economy's experience have hours fallen so fast. Given what has happened to hours in the recent past, the standard historical pattern would lead you to expect output to be falling at 2.5% per year or more--and you would expect productivity growth to be negative, not positive and in excess of 4% per year. We are indeed in uncharted waters. Not that we should mind--extraordinarily rapid productivity growth is a wonderful gift. But it does pose different problems for economic management to solve than the ones we had gotten used to......

News about the economy in the spring released since the initial estimate of second-quarter GDP growth tells us that the second-quarter growth rate is likely to be revised upward significantly--from a 2.4% annual growth rate to perhaps a 3.0% annual growth rate. This is excellent news for production and productivity: Forbes.com: Analysts see U.S. 2nd quarter GDP upward revision: Merchandise trade data out on Thursday showed exports rose a healthy 2.4 percent in June, while in real terms, which is what matters for gross domestic product, the trade deficit narrowed sharply to $47.23 billion from $50.04 billion in May. The [trade] deficit was much smaller than that assumed by statisticians in the advance measure of GDP released on July 31, suggesting trade subtracted less from growth than the 1.56 percentage points initially estimated. The trade news comes hot on the heels of significant upward revisions to retail sales figures for both May and June. On Wednesday the Commerce Department unexpectedly upped its June estimate of sales to a rise of 0.9 percent from 0.5 percent, while May now shows a gain of 0.5 percent when it was flat before. The sudden discovery that consumers spent a lot more than first...

The Economist explains the currently-limited power of monetary policy: Economist.com: Of course, what the Fed manages to convey about what it will do in the future is as important as what it does or does not do in the present. The FOMC has its hands on only the shortest of short-term interest rates--the overnight rate at which banks can borrow federal funds. Trimming a quarter point one way, or tacking a quarter point the other, is not in itself enough to steer America's huge economy. If the Fed wants to reduce the longer-term rates that really matter, it must not only get short-term rates down, as it has done, but it must also signal to the market that they will stay down. If the bond markets read and believe the Fed's signals, short rates will feed through into long rates almost immediately. That way, as Michael Woodford, a Princeton economist, puts it, the Fed can get the bond market to do its work for it. But the bond market can also work against it, as it has done over the past month. Since mid-June, the yield on the ten-year Treasury bond has risen by almost 40%. The futures market was...

Spending on services is acyclical--it does not change over the business cycle. Spending on goods does change: it falls in recessions, and rises rapidly during expansion. Spending on durable goods is even more cyclical: you can postpone purchases of durables when cash is tight during a downturn, and accelerate durables purchases when cash is plentiful. Spending on capital goods to make durable goods is even more of a business-cycle roller coaster: businesses will buy the capital goods needed to make durables only when they find that high demand for the durable goods they make has brought them to the limit of their capacity. And the most cyclically-sensitive sectors of all--the tip of the whip that is the business cycle--make the equipment needed to make the capital goods that firms purchase in order to produce durable goods. One firm in particular--Applied Materials--is the preeminent manufacturer of the equipment needed to make high-tech capital goods. And so today investing in Applied Materials is, as the Financial Times writes, a clean and highly leveraged bet on the strength of America's current anemic business-cycle recovery--a bet only for those with "iron nerves": FT.com Home US: For a leveraged bet on the tech rebound, they...

Forecasters are beginning to expect that higher corporate profits will lead to more investment spending. Unfortunately, forecasters seem to see no declines in the unemployment rate until next summer... WSJ.com - Spending by Corporations May Give Economy a Jolt: Though wary from rallies that never materialized and economic bright spots that quickly faded, economists are beginning to feel more confident: They have raised expectations for third-quarter growth, and say a rebound in corporate profits should prompt companies to finally boost capital spending and investment. "All through the downturn I've felt that all that we have seen are false starts. But for the first time, I have to say, I think we're headed into the real thing," said Allen Sinai, chief global economist at Decision Economics in New York. The average forecast of the 54 economists who participated in The Wall Street Journal Online's economic survey this month put growth for the current quarter at an inflation-adjusted annualized rate of 3.6%, up from the 3.5% average forecast in a survey conducted in June. Expectations for an acceleration in growth late this year and early next year were unchanged. In the second quarter, gross domestic product -- the broadest measure of economic...

The Economist focuses on this past quarter's productivity growth number, without taking a look at the larger picture: Economist.com: Output has dipped and climbed, but has the trend rate of growth risen? Economists are still far from a consensus.... When the productivity figures did pick up in the second half of the 1990s, all of the assorted gurus, bulls and nerds claimed vindication. Even Mr Greenspan became a cheerleader for the new economy, albeit a rather taciturn and oblique one. The cheers faded as the stockmarket bubble burst and the economy went into recession. But the collapse in share prices does not itself disprove the notion of a new economy. The bears can be right without the nerds being wrong, because technological revolutions do not always pay off for the people who bought stocks in them. The railroad investors of the late 19th century, for example, made no money from their stakes in America's rail companies, but most agree that the economy as a whole benefited. Productivity gains can be real, without showing up in your dividend payments. The gains might go to workers, in the form of higher wages, or they might show up in the creation of new...

From the New York Times: Faster 2nd-Quarter Growth Fuels Optimism: The United States economy threw off its sluggish growth in the second quarter and expanded at a 2.4 percent annual rate, pulled up by rising military and consumer spending and, at long last, a revival in business investment in computers and software, the government reported yesterday. The spring upturn has nearly every forecaster, even the pessimists among them, signing on to the proposition that the national economy is finally breaking out of the weak, jobless recovery that has lasted for 18 months... Huh? The spring upturn in production was a nice positive surprise. But it was not not the end of the "jobless recovery": hours worked by Americans shrank at a 1.6% per year rate in the second quarter. The spring upturn was a positive surprise not because output growth pulled employment up, but because fast productivity growth allowed the American economy to satisfy stronger demand even with the putrid labor-market performance of the spring....

Yes! The second quarter (April-June) showed significantly faster real GDP growth than I (and everybody else) had been expecting: GDP grew at a 2.4% per year annual rate (meaning that second-quarter real GDP was 2.4%/4 = 0.6% higher than first-quarter real GDP. Now IIRC, average hours worked were down 0.2% in the second quarter vis-a-vis the first quarter, and employment was down in the second quarter by 0.2%, meaning that Americans worked 0.4% fewer hours in the second quarter than the first quarter--that labor input shrank at a 1.6% per year annual rate. Combine a 2.4% per year rate of growth of real GDP with a -1.6% per year rate of growth of labor hours, and you have a 4.0% per year rate of growth of labor productivity. That's a very impressive number for the long run. But in the short run it drives a big wedge between the (relatively good) production news and the (relatively bad) employment news. GDP growth accelerates in 2Q - Jul. 31, 2003: Gross domestic product (GDP), the broadest measure of economic activity, grew at a 2.4 percent annual rate in the quarter after growing at a sluggish 1.4 percent rate in the first quarter,...

MSN's Jim Jubak worries about the striking divergence between the (relatively pessimistic) expectations of consumers and the (relatively optimistic) expectations of Wall Street analysts. He seems to come down on the side of consumers: he thinks that the confirming numbers one would expect to see if analysts' forecasts of a strong second-half recovery were coming true are hard to find: MSN Money - Jubak's Journal: ...So why such different reads on the future from consumers on Main Street and analysts on Wall Street? The conventional explanation is that consumers are pessimistic because their emotions are so heavily influenced by the continued high level of unemployment.... Wall Street tends to dismiss the jobs worry. Unemployment is a lagging indicator.... But that explanation sells consumers short. Looking around, consumers can see that companies are still in the last stages of announced cost-cutting and the next six months will bring additional layoffs. Wall Street analysts have their own data problem. There's nothing in second-quarter results or company guidance for the third quarter that shows the long-anticipated second-half recovery will arrive on schedule.... Look at the technology sector. Earnings per share gains of 21% in the second quarter have come on revenue gains of...

Bad news this morning about the U.S. business cycle: Consumer confidence plunges - Jul. 29, 2003: The Conference Board, a business research group based in New York, said Tuesday that its closely watched index of consumer confidence fell to 76.6 from 83.5 in June. Economists, on average, expected confidence to rise to 85, according to a Reuters poll. The Conference Board's "expectations" index, which measures how consumers feel about the future, fell to 86.4 from 96.4 in June. The "present situation" index dropped to 61.9 from 64.2. "The rising level of unemployment and sentiment that a turnaround in labor market conditions is not around the corner have contributed to deflating consumers' spirits this month," Lynn Franco, director of the Conference Board's Consumer Research Center, said. "Expectations are likely to remain weak until the job market becomes more favorable."... Yeah. And the job market will not become more favorable until after expectations become strong. This is disappointing....

Well. It's starting to look good--as if we may finally get a healthy recovery, in production at least: Forbes.com: WRAPUP 2-U.S. June factory orders, new-home sales up: WASHINGTON (Reuters) - Orders for costly U.S. manufactured goods shot up in June at the fastest rate in five months while sales of new homes hit a record, reports showed Friday, boosting optimism the recovery is gaining speed. The surprisingly strong signs of economic revival gave investors a jolt of energy that sent stock prices higher, but some analysts cautioned it will take some time to gauge whether a quicker economic pace has taken hold. A housing industry group suggested the recent uptick in long-term interest rates may be casting some gloom on the hot sector. In addition, economists noted the durable goods report is often volatile and subject to sharp revision, especially with many factories shutting down for retooling in July. The Commerce Department said orders for durable goods -- items like cars and refrigerators designed to last three years or more -- climbed 2.1 percent to a seasonally adjusted $172.5 billion last month after being flat in May......

Richard Berner of Morgan Stanley sounds very bullish on the American economy: Morgan Stanley: ...There are encouraging signs for our recovery call.  Consumer demand is improving, and with relatively lean inventories, production has begun to play catch-up.  As a result, some improvement in growth from the tepid 1.5% pace of the past nine months seems to be in train.  Make no mistake, however; it is too soon to proclaim an acceleration to 4%-plus growth.  That's still only a forecast, and key risks remain.  Among them: Labor markets are still soft, as companies are reluctant to hire.  Global growth is weak, and there is no obvious non-U.S. engine of growth.  And energy prices are still high, with crude quotes well over $30/bbl and gasoline prices edging back up in July.  Even these risks, however, may be abating.  Are the signs of recovery sustainable? And will the evidence of peaking risks continue?  Yes, in both cases, in my view.  Here's why. First, let's quickly review the analytics.  Five factors lie behind our call for stronger growth: Post-bubble headwinds are fading; for example, in the ratio of capital spending to depreciation, I see some signs of building pent-up demand (see "Higher Rates Will...

The NBER's Business Cycle Dating Committee has decided that the last business-cycle trough took place in November of 2001. More interesting, they seem to have dropped employment from their list of principal monthly indicators. Their report puts income first, industrial production and sales second, and refers to Macroeconomic Associates's estimates of monthly GDP: Release: For these reasons, the committee refers to a variety of monthly indicators to choose the exact months of peaks and troughs. It places particular emphasis on real personal income excluding transfers and on employment, since both measures reflect activity across the entire economy. The committee places less emphasis on the industrial production and real sales series, which mainly cover the manufacturing and goods-producing sectors of the economy. The committee also looks at estimates of monthly real GDP prepared by Macroeconomic Advisers. There is no fixed rule about what weights are assigned to the various indicators, or about what other measures contribute information to the process... IIRC, it used to be that employment, incomes, sales, and industrial production were more-or-less all given equal weight. It also used to be that those four series tended to have peaks and troughs that were very tightly clustered together. It is...

Greg Mankiw: Deficits And Economic Priorities (washingtonpost.com): The administration's budget update, released yesterday, shows the economic recovery is picking up steam. It also shows a budget deficit for 2004 of $475 billion.... [U]nder the president's proposals, the deficit will shrink from 4.2 percent of gross domestic product in 2004 to 1.7 percent in 2008. The key to achieving this is more-rapid economic growth, which will bring in more tax revenue, together with restraint in the growth of government spending. Because the deficit is shrinking, the accumulated level of national debt is not expected to become problematic... Alan Greenspan: Greenspan Sees Danger In Deficits (washingtonpost.com): Federal Reserve Chairman Alan Greenspan warned yesterday that continuing large federal budget deficits eventually would cause long-term interest rates to rise and damage U.S. economic growth. "There is no question that if you run substantial and excessive deficits over time, you are draining savings from the private sector, and other things equal, you do clearly undercut the growth rate of the economy," Greenspan told the Senate Banking Committee. On Tuesday, the Bush administration forecast that the deficit will reach $455 billion in fiscal 2003... [a]s economic growth improves and the nation nears full employment, the deficit...

Greenspan made two points that I did not really expect. The first is the Federal Reserve's new position that it still has "substantial" room to cut short-term interest rates, even though the target Federal Funds rate is now a low 1% per year. The second is that the Federal Reserve thinks that the accounting scandals have played a significant role in discouraging investment--in which case the failure of the Bush administration to take action and the great Harvey Pitt follies have been very expensive for the American economy. Greenspan: Further interest rate cuts possible - Jul. 15, 2003: NEW YORK (CNN/Money) - The Federal Reserve could make further substantial cuts in interest rates, Alan Greenspan told Congress Tuesday, but the central bank chairman also said the Fed was not ready to take unusual steps such as buying Treasury bonds to give a lift to the economy. "With the target funds rate at 1 percent, substantial further conventional easings could be implemented if (Fed policy makers) judged such policy actions warranted," Greenspan said in remarks to the House Financial Services Committee. Greenspan also said the Fed, the nation's central bank, was ready to keep rates low for a "considerable" period of...

The Washington Post's John Berry gives a very interesting look: his take on the back-and-forth within the NBER's Business Cycle Dating Committee. As Berry interprets it, the NBER is moving away from its old methodology ("We use the common pattern shown by cyclical indicators to gauge the state of the business cycle. What are cyclical indicators? Cyclical indicators are those that are useful in gauging the state of the business cycle.") to one that will ultimately conclude that a recession is a six-month decline in estimates of seasonally-adjusted monthly real GDP. I would prefer a shift to a three-part classification: recession, expansion, and employment stagnation. But I'm not on the NBER BCDC. washingtonpost.com: Number Crunchers vs. Recession: The arbiter of when U.S. economic recessions begin and end, the Business Cycle Dating Committee of the National Bureau of Economic Research, has laid the groundwork for calling an official end to the slump that began in March 2001.It could be weeks or months before that happens, but the committee has found a way around the fact that its key monthly indicator, payroll employment, has continued to decline long after the economy resumed growing.The committee designated March 2001 as the beginning of the...

David Wessel wonders when the real recovery will begin--when real GDP will begin to grow at the 3.5% per year pace that we think is needed to keep the unemployment rate from rising, or the 4.0% per year pace that we think is necessary if unemployment is to start to decline (and even then only slowly: by perhaps 0.2 percentage points per year). Forecasters tell him that the real recovery should begin very soon--but they said the same thing six months ago, and six months before that as well. More disturbing is the fact that it is not at all clear where any extra boost to the economy could come, should one turn out to be needed. The Federal Reserve is out of gunpowder. More aggressive fiscal policy--bigger short-run deficits--would be possible, but neither the president nor the congressional majority has shown any inclination at all to think seriously about how to try to use spending and tax policy to boost employment and growth in the next year or so. If neither monetary nor fiscal policy can be of use, the only remaining policy lever is to try to boost exports by talking the dollar down--a very difficult, hazardous, and...

Morgan Stanley forecasts that the economy will either "muddle through or gain steam." I don't, however, understand their expectation of a radically different tone to the labor market in a few months--remember, at the average post-1995 labor productivity growth rate, we need about 3.6% per year real GDP growth just to keep the unemployment rate from rising. Morgan Stanley: ...Thus, it's far from catastrophic that convincing evidence is so far lacking for a meaningful economic acceleration.  But it does speak to the fact that consumers and businesses remain cautious.  Courtesy of declining energy prices, consumers clearly stepped up their spending pace in the last few months; real outlays rose at a smart 4.4% annualized clip in the three months ending in May, compared with a 2% rate in the first quarter.  But their appraisal of current economic conditions has essentially been unchanged for the past nine months, hinting that the faster pace isn't sustainable without improvement in fundamentals, namely income and jobs. And that's our key worry: Business hiring caution has kept the recovery jobless, with the current experience marking the worst employment performance of any postwar recovery.  We expect a dramatically different tone to labor markets soon, as the...

As if the world economy needed another factor adding drag... Economist.com: MANY of those who advocated war in Iraq argued that it would be a relatively cheap exercise. After all, Iraq sits on the world’s second-biggest oil reserves after Saudi Arabia; even before the war, the country was thought to have a production capacity of 3m barrels per day (bpd). All the conquering coalition troops would have to do is fix up the creaking or damaged oil wells and refineries, and Iraq would soon start paying for itself. Unfortunately, things haven’t turned out that way. Thanks to some astute forward planning (and the advance deployment of special forces), there was very little wartime damage to Iraq's oil fields. Since the war, though, disgruntled supporters of Saddam Hussein have sabotaged oil fields and pipelines. So Iraq has yet to export any oil produced since the war, a state of affairs that has buoyed the oil price. Now a general strike in Nigeria, triggered by a jump in the cost of petrol, threatens that country’s 2m bpd output. Some oil experts now think the oil price, currently bobbing around the $30 mark, could climb as high as $35 if the strike, already...

The Wall Street Journal's stable of forecasters is looking for a strong rebound in economic growth after the most recent three bad quarters. WSJ.com - Economists Forecast A Second-Half Rebound: ...Last year at this time, for example, after the magnitude of the accounting scandals had already become clear, the consensus was still predicting a return to growth rates of about 3.5%. Instead, the economy grew at a 1.4% annual rate in the fourth quarter of 2002, and repeated that performance in the first quarter of this year. The second-quarter growth rate is believed to have been close to the same tepid level. The Commerce Department will report preliminary second-quarter growth later this month. These are the perils of predicting the future. Even the Federal Reserve has had its share of missed forecasts in recent years. In 2001, for example, Fed economists predicted the economy would grow by a little more than 2% and the unemployment rate would drift up to 4.5%. Instead it grew by 0.3% and the unemployment rate shot up to 5.8%. And last year at this time, the Fed was also predicting growth rates in excess of 3.5% by now. What is so alluring about the 3.5%...

John F. Irons is really annoyed that George W. Bush is trying to backdate the start of the recession to 2000. Of course, the real thing to get annoyed about is that the Bush Administration has done so very, very little to fight the recession: This isn't to say that Bush somehow caused the initial recession (although it certainly didn't help that VP Cheney was running around in the country in late 2000 and early 2001 telling everyone how the economy was in bad shape.)... The important question is not whose fault is the recession, but rather what has been the response of the administration to the economic situation. We have seen 3 major tax cuts... each of which were sold as economic and job stimulus, but which in reality had very little to do with good counter-cyclical fiscal policy, or with the current economic problems. The result? Unemployment continued to increase and is up to 6.1%, and there have been 2.5 million jobs lost since March 2001... As I've said before, the failure of the Bush Administration to take any significant steps to boost aggregate demand over the past two years is remarkable and strange. The most they've done...

A surprising disappointment: Durable goods orders down 0.3% in May - Jun. 25, 2003: U.S. durable goods orders sank 0.3 percent last month -- in contrast to the expectations of private economists that they would rise 0.8 percent. The data from the Commerce Department showed April orders plunged 2.4 percent, revised down from an earlier reported 2.3 percent drop. The report showed broad-based weakness in demand for big-ticket items, with categories such as cars, computers and machinery showing declines. Excluding the volatile transportation sector, orders edged up 0.2 percent, a much weaker showing than the 1 percent gain projected by economists in a Reuters survey......

The NBER's Business Cycle Dating Committee continues to hesitate. But it is not the case that more time will make the state of the U.S. economy between the start of 2002 and today clearer. The state of the U.S. economy is clear: slow growth in demand and output accompanied by rapid underlying productivity growth and so declining employment. What is unclear is what the NBER thinks a "recession" is. More time may be needed, but not because more time would shed better light on the state of the economy--rather, more time seems to be needed for the Business Cycle Dating Committee to think through what its system of categories really is. The NBER's Recession Dating Procedure: According to the most recent data, the U.S. economy continues to experience growth in income and output but employment continues to decline. Because of the divergent behavior of various indicators, the NBER's Business Cycle Dating Committee believes that additional time is needed before interpreting the movements of the economy over the past two years......

The Washington Post's John Berry puts his ear to the ground and guesses that the Federal Reserve will cut interest rates next week by 0.50 percentage points (a 60% chance) or by 0.25 percentage points (a 40% chance). That seems about right to me--but his sources are much, much better than mine. One bone to pick, however. John Berry says that economists were "surprise[d]" by the fact that "recovery has been halting and 'jobless' despite huge doses of monetary and fiscal stimulus." This economist hasn't been surprised. Simply look at the late-1990s boom and the structural sources of the acceleration in productivity growth, and a "jobless recovery" looked like a definite possibility. Rate Cut Looking Like a Sure Thing (washingtonpost.com): ...Federal Reserve officials, concerned there is still no sign of the solid pickup in U.S. economic growth needed to foreclose the possibility of deflation, appear certain to cut their target for overnight interest rates next week. There is broad agreement among investors and analysts that a rate cut is coming, but there is disagreement about whether policymakers will lower their 1.25 percent target by a quarter-percentage point or by a half-point. The latter seems to be more likely as a...

Europe teeters on the edge of recession... FT.com Home US: The European Central Bank on Thursday halved its growth forecast for the eurozone this year to just 0.7 per cent from 1.6 per cent, raising market expectations of further interest rate cuts in the months ahead. The bank, which also cut its forecast for growth next year to 1.6 per cent from its earlier projection of 2.4 per cent, made in December, said the revisions were prompted by the rapid appreciation of the euro. Inflation was projected at 2.0 per cent this year, slightly above earlier estimates, but was forecast to fall swiftly next year to 1.3 per cent, well short of the bank's close to but below 2 per cent price stability target......

The post-Iraq War bounce-back continues to be missing in the dataflow: FT.com Home US: US retail sales were flat in May and the number of new requests for jobless benefits remained high last week - signs that the economy continues to show little growth. The Commerce Department said retail sales rose only 0.1 per cent in May after a 0.3 per cent decline in April. The results were somewhat depressed by a drops in cas and gas sales. Excluding those declines, sales were up 0.6 per cent after a 0.4 per cent decline in April. All figures are seasonally adjusted. Seperately, the Labor Department said first-time unemployment insurance claims fell by 17,000 to 430,000 last week - but that result remains well above the 400,000 level most economists associate with a shrinking job market. The four-week moving average, a smoother gauge, rose to 433,750 from 431,500......

The Federal Reserve's "beige book" finds that the postwar business cycle-recovery glass is not half full. But there is water in it... Yahoo! News - Fed Says Economy May Be Near a Rebound : ... The central bank said that four of its 12 districts -- Dallas, Kansas City, New York and Minneapolis -- detected signs of increased economic activity and no district reported further deterioration since the last report in late April. "The unwinding of war-related concerns appears to have provided some lift to business and consumer confidence, but most reports suggest that the effect has not been dramatic," the central bank said in its latest survey of business conditions. The central bank cautioned against reading too much into the scattered signs of a rebound, describing overall activity in many districts as still "sluggish, subpar or subdued." The survey of business conditions, known as the beige book for the color of its cover, will be used by Fed policy-makers when they meet June 24-25 to set interest rates. Many analysts are convinced that the Fed will cut rates for a 13th time at that meeting in an effort to make sure that the current weak patch the country is...

*Sigh.* Atrios links to an AP report on this morning's bad economic news--an ungood unemployment insurance claims number for the very last week of May, and an ungood manufacturing orders number for April. It may be time to shave another tenth of a percent or two off of the forecast growth rate for 2003... *Sigh.* Jobless Claims Rise to Five-Week High; Factory Orders Drop in April - from Tampa Bay Online: WASHINGTON (AP) -The number of American workers filing new claims for jobless benefits climbed to a five-week high last week as companies coped with an economy that is struggling to get back on firm footing. The Labor Department reported Thursday that new applications for unemployment insurance rose by a seasonally adjusted 16,000 to 442,000 for the work week ending May 31. The increase pushed claims to their highest level since the week ending April 26. In another report, orders to U.S. factories fell 2.9 percent in April from March, marking the largest decline in 17 months, the Commerce Department said. The decrease was a lot deeper than the 1.8 percent drop economists were forecasting. Manufacturing, which has slashed jobs and cut production, has been a major trouble spot for...

One sign that second-quarter growth in demand may be stronger than first-quarter growth (which, alas, does not mean that employment will stop shrinking yet): Service sector grows more than expected - Jun. 4, 2003: NEW YORK (CNN/Money) - Activity in the U.S. service sector heated up in May, the nation's purchasing managers said Wednesday, beating analysts' expectations. The Institute for Supply Management's reading of non-manufacturing activity came in at 54.5, compared with 50.7