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The Economy
Will this economic recovery fizzle out?
Or will it finally pick up some speed?
It’s easy to find evidence for either view.
We remain optimistic, expecting
growth to increase over the second half of this year and accelerate further
in 2004. Here’s why:
Business is stepping up to the plate.
Capital investment rose nearly 7%
in April-June ... robust growth by any standard and a clear indicator
of a change in direction.
Orders are up, say purchasing
managers. That will lead to more production, more sales, more profits,
and, eventually, more jobs. Moreover, managers in most U.S. industries
now anticipate better economic times ahead. If they expect growth, they’ll
place more orders, creating growth.
More temp workers are being hired.
Despite the net loss of jobs in July, companies put about 42,000 additional
temp workers on payrolls. That’s an indication that some businesses,
although unwilling to commit to permanent hires, are feeling the need
to beef up their manpower.
And interest rates are up. Yes,
that’s a GOOD sign as a whole. It means investors are feeling renewed
confidence in corporate profits, so are shifting out of the safe haven
of bonds, back to the stock market. It also means that they expect at
least some moderate price increases and that the bogeyman of deflation
has been chased back into the closet.
Washington is pouring billions into
the economy. Fully half of the 2.4% jump in GDP in the second quarter
came from federal spending, much of it on defense. With a $4-billion-a-month
price tag for Iraq, military outlays are going to remain high. At the
same time, tax cuts are just showing up in lower tax withholdings and
child credit rebates.
And consumer spending, though lackluster,
is hanging in there, growing 3.3% in April-June and likely to maintain
a 3% pace through Dec. The upward swing in interest rates won’t
dent home buying much. After all, they are still at historically low levels.
The rise in rates will, however, distinctly chill the red-hot mortgage
refinancing trend.
The jobless rate remains a worry, as
do losses in manufacturing.
High rates depress consumer confidence,
at least in some surveys.
But what consumers say and do don’t
always jibe. In 2001, consumer confidence plummeted following Sept.
11, but sales soared. And though distressingly persistent, manufacturing
job losses should stop by year end, with job growth starting a few months
after.
Energy
An energy bill is certain this year.
Both parties want one:
The GOP because the bill will give tax breaks for conservation and renewable
energy, shielding Bush from charges he’s anti-environment. And because
it will encourage more oil and gas drilling in the U.S. Conservation and
renewable energy are also important to many Democrats, as is a provision
to mandate ethanol use in gasoline. It’s a must-have for Senate
Minority Leader Daschle (D-SD), who promised it to farmers.
Nuclear power will get the nod
via financing help for new plants.
Ditto, a national electricity grid
to smooth delivery of power.
War on Terror
U.S. intelligence agencies will NEVER
march to the same beat.
But they’ll get better coordinated
in sharing what they know. A “tip-off” computer link already
established between the CIA and the FBI will soon be combined with a supercomputer
providing instant analysis. And new “intel liaisons” will
help reduce turf battles to some degree.
An FBI business-threat-alert system is
on tap for executives in charge of defense, energy, chemical, and
other strategic facilities. It will give them detailed information when
specific threats emerge.
Local cops are being brought into the
fold, but it’ll take years before links between all levels
of law enforcement are fully operational. The feds want to go slow to
minimize the risk of costly security leaks.
Counterfeit goods aren’t just
costing manufacturers big bucks.
Terrorists are increasingly relying on
them for their financing. Al Qaeda, Hezbollah, and the Irish Republican
Army are all getting funds from counterfeiters sympathetic to their causes.
Counterfeit products are easy and cheap to make, leave no paper trail,
and reap big profits.
Ironically, many buyers are Americans.
With Uncle Sam preoccupied with identifying and stopping terrorists and
weapons at the borders, more fakes are finding their way into the U.S.
now than before Sept. 11.
Bush is ratcheting up pressure on Saudi
Arabia with his refusal to declassify a portion of the recent congressional
report on Sept. 11 dealing with accusations about the Saudis’ role
in financing the attacks. The Saudis want the report released, believing
that it exonerates them. Bush’s aim: Force the royal family to expel
members who support al Qaeda.
Afghanistan won’t settle down anytime
soon. Warlords still rule in most regions outside Kabul. The Taliban
are regaining influence, undermining reconstruction efforts. And opium
production is on the rise. $1 billion in pending U.S. aid to the country
won’t change the outlook.
Getting Saddam Hussein would give Bush
a huge political boost, culminating a very successful deposing
of a ruthless, dangerous regime. It would briefly divert attention from
charges that Bush hyped the threat of nukes in Iraq as a pretext for invasion
and to win allied backing.
But nabbing Saddam would be no panacea
for the problems in Iraq. Short term, it might make matters worse, with
his supporters retaliating against U.S. forces. Stopping the guerrilla
efforts will take a long time because curbing the flow of money and ammo
fueling them is no easy task. And building Iraq into a democracy remains
a difficult and distant goal.
Bottom line: We’re in for a long
and costly haul in Iraq.
© 2003 The Kiplinger Washington Editors, Inc.
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