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.