The Journal Editorial Report | July 29, 2005 | PBS
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briefing and opinion
July 29, 2005

Could Be Better

There was more good economic news this week, ranging from Gross Domestic Production figures revised upward, to stocks moving higher on strong earnings like Starbucks, where quarterly earnings were up 29 percent in part because so many people are willing and able to pay higher prices for new drinks. Still, if you ask Americans how they feel about the economy, most of them are negative, and blame it on President Bush.

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The puzzle of this economy is one of perception versus reality. Consumers are behaving as if the economy is stronger. Two-thirds of the U.S. economy is consumer spending and in the second quarter consumer spending grew as illustrated by surging sales of big ticket items such as cars. Dealers are enjoying a phenomenal summer as are retail chain stores. But, while spending is generally a key indicator of consumer confidence, recent polls tell a different story.

The Gallup poll found 63 percent rated the economy only fair to poor. In fact, more Americans said the economy was getting worse than said it was getting better. And, only one in four said President Bush's policies were helping. Still the market for new and existing homes is very strong and is likely to hit record numbers this year. Interest rates remain low and home values continue to rise making it easier for owners to pull out cash through financing -- money used to spend to buy more.

The stock market also seem to be out of sync with consumer fears. Stock prices ebb and flow, but the market is generally trending upward. Overall the S&P hovers around a four-year high. Higher oil prices challenged confidence, but even this did not seem to slow spending.

Improving sales meant stronger growth and a growing economy created jobs. Unemployment is at a four-year low, but without the normal rise in inflation. Nonetheless, unemployment still tops the list of economic problems for most Americans.

More jobs meant that payroll, business and personal income taxes generated more money than expected. Although critics say the long-term budget deficit picture remains worrisome, especially as long as there's a huge gap between tax receipts and government spending, the growth of the federal deficit appears to be shrinking, even if the public's negative perception of the economy is not.

PAUL GIGOT: Joining us to discuss the economy is Steve Moore, a member of the editorial board specializing in economics. Steve, five percent unemployment rate, four percent average growth over the last two years, strong stock market and so on -- all good signs. Do you see any reason to doubt the economy's strength?

STEVE MOORE: If I were any more of a bull on this economy I'd have horns coming out of my head right now. It's hard to see virtually any negative signals. This is about as good as it gets. You mentioned some of the leading indicators of the economy. We have the lowest unemployment rate in the industrialized world today. We're creating a good number of jobs.

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It used to be, remember, the jobless recovery. Well, we're creating about a 100 to 200,000 jobs a month which is fantastic. The most important thing about this economy is that it's a classic, what we call, supply-side expansion. That is to say it's being led by businesses spending more money. You're seeing a rebound in the manufacturing sector. We're not de-industrializing in this country, quite to the contrary. I think this is about as good as it gets with respect to these economic figures.

GIGOT: Business investment has been a driver is what you are saying, not just consumer spending, and that began to turn in early 2003.

MOORE: Just about the time of the Bush tax cut.

GIGOT: Well okay, alright then if things are so good why do people feel so lousy, Kim?

KIM STRASSEL: I think there's a lot of stuff that are weighing on people's mind. We've got $60 a barrel oil, which has made all energy costs much higher. People are living under a constant threat and worry of another terrorist attack. There are questions of rising interest rates. Businesses in particular are still sort of dealing with a scary regulatory environment. They're not quite sure where things are headed. Sarbanes-Oxley, a lot of new regulatory things put upon them.

GIGOT: That was a corporate accountability bill of three years ago which has added a lot of costs onto business.

STRASSEL: Exactly, and despite all this we're still sort of zooming ahead. So think about what would be happening if we didn't have all of these worries.

BRET STEPHENS: I think you can't over state the influence of the media on people's perceptions of the economy. I mean all the way up until 2004, as Steve said, people talked about a jobless recovery or a very flabby recovery. All of sudden we have a year of extremely solid growth, the best growth we've had since 1999. And what do people say? Ah, we have a bubble. There's a bubble in the housing market. There are inflation worries.

And so the media story shifted very quickly from a poor economic recovery to sort of on the eve of a 1929 stock market crash and I think that colors people's perceptions. I think that's why people aren't feeling quite as confident in addition to the real factors that Kim mentioned.

MOORE: The question is why are the media and liberals portraying the economy as so negative? I really think a lot of these folks are sort of cheering against American economy. Why? Because they want Bush to fail and they want Bush's policies to fail.
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Two years ago President Bush passed a very controversial tax bill that we endorsed, a capital gains tax cut, a dividend tax cut, lower income tax rates. We said that it would lead to a recovery in the stock market, that it would lead to more business investment. All of those things are happening. Low interest rates.

Remember, the opponents of the tax cuts said "Oh, we can't do this, the deficit is going to go up. We're going to have record high interest rates." Well, we have record low interest rates.

GIGOT: Let me offer one other point through which I think does underneath this economy lead to some anxiety and this is globalization. I mean it's creating rapid change, this global competition, and the trade with China and a lot of these other countries, imports from these countries are upsetting a lot of old industries. Textiles in the southeast, for example, there's no question. Furniture makers in North Carolina and Michigan. These people are really affected by it. Is there some lingering anxiety from that that makes people say you know what, I don't feel very secure?

MOORE: There's no doubt about it and it's generational, Paul. I mean people who are in their 50s who may have lost a job that was paying $24 dollars an hour as an auto worker, it's hard to find a new job if you're in your mid 50s in this new economy. But for the new generation of workers, where are the jobs? They're in the technology industry, some pharmaceutical. These industries that are really the industries we want to be the leaders in.

STRASSEL: And you have to remember, I mean, globalization in a way is also encouraging companies to get rid of some of their worst things that drag us down. I mean the union debate that's been going on this last week is a perfect case in that you know, companies need flexible labor pool. They need not to have these very expensive pension and healthcare programs that they have. These are things that have been driven by unions. Capital markets are starting to place their bets on companies that are not weighed down by this and you see money going to Wal-Mart rather than to General Motors. It kind of continues that way and this is actually good for the economy as a whole.

GIGOT: What about the argument, we've heard that there's been a study at the Federal Reserve Bank of Boston making the case that the five percent jobless rate is actually not as low, it's something of a mirage because what it hides is the fact that a lot of workers have just left the job market. They're not even looking any more.

STEPHENS: Well, Alan Greenspan vigorously disputed that study and I would guess that he's probably right. It is true that our employment rate as opposed to our unemployment rate, that is the percentage of the adult population in the workforce, is a little lower than it was at the peak of the boom in the late 1990s. But the reasons for that aren't necessarily the reasons that this economist suggests, that people have just given up looking for jobs. A lot of women are deciding to stay home to raise children for example instead of entering the workforce. That's one very large factor. I think it's a fairly facile argument to say that the slightly lower employment figures suggest this kind of despair.

GIGOT: Alright, with this group of bulls here, are there any signs, any reason to think looking ahead that there are some risks out there to the continuation of this expansion, Steve?

MOORE: I think that Kim really hit on the biggest risk in this economy and that is terrorism. If we had another major terrorist incident that would have a very shocking impact on the market. But all of these other signs, and we haven't mentioned for example the investor class of Americans who are gaining dramatically because of the rebound in the stock market and the housing market. The principal asset that most Americans own is their home and guess what, in the last eight years homes have doubled in value which means Americans wealth has increased.

GIGOT: Let me just play a little bit of devil's advocate here and that is I put one risk on the table and that is the Federal Reserve. Because what I think is that they stayed so easy with their interest rates for so long that I think they allowed inflationary expectations to build up some and I think you're going to see that coursing through the economy. You're already seeing that inflation is going to go up from under two percent to probably three percent and I think they're going to have to raise interest rates a lot of higher than some people think they're going to have to do. We don't know what effect that will be. I'm not smart enough to know that, but I think it will have some effect.

STEPHENS: There's one other important risk which is the risk of the political class to the health of the economy. Just this week the Central American Free Trade Act passed by essentially one vote in the Congress and there is a protectionist sentiment, if that gets out of hand we're going to have trouble ahead.

GIGOT: Policy mistakes are always a huge risk.