- The Washington Times - Thursday, June 19, 2003

A leading barometer of economic activity rose sharply last month, in a sign the economy may be headed for a boom later this year.

A broad range of improving trends — from surging stocks and consumer expectations to declining jobless claims and record-low interest rates — prompted the 1 percent jump in the Index of Leading Economic Indicators reported yesterday by the Conference Board, a private economic-research group.

It broke a string of flat readings in the index that has prevailed for much of the past year. But while the outlook is brightening and has been stoking a strong rally in financial markets, joblessness remains high and continues to cast gloom over the economy.

The index’s measure of current economic activity remains flat, and the Labor Department reported that new claims for unemployment benefits, while down by 13,000 last week, remain well above the 400,000 threshold that signals the economy continues to lose jobs.

“The second half will surely look better than the first,” despite the uncertainties that continue to hang over the economy, said Diane Swonk, chief economist at Bank One. Growth is running at a rate between 1 percent and 2 percent.

Mrs. Swonk sees a possibility that “we blow the top off the economy in 2004” because of building momentum in housing and car sales, and a resurgence of spending on tourism, entertainment and other areas.

Some economists are betting on an economic boom later this year, not so much because of the modest signs of pickup reported recently as because of the massive stimulus the economy is receiving from low interest rates, tax cuts and a weaker dollar.

The Federal Reserve’s announcement last month that it will keep cutting interest rates until growth is fast enough to prevent a further big drop in inflation prompted a dramatic decrease in market interest rates in anticipation of further Fed action, including a rate cut expected next week.

With legislation providing more than $120 billion of tax cuts to workers and investors in the next year, and a 15 percent drop in the dollar that makes U.S. goods more competitive in world markets, some analysts say the economy is poised to take off.

“It becomes very hard to bet against a stronger second half,” said Mrs. Swonk, noting that a steep drop in oil prices from 10-year highs in March and a record wave of mortgage refinancings that is freeing up money for consumer spending are adding fizz to the economic tonic Washington is providing to the economy.

Richard DeKaser, chief economist at National City Bank, said the stimulus hitting the economy should produce a liftoff this summer.

“If you’ve been worried about economic growth going forward, stop now. The stimulus chickens are about to come home to roost,” he said.

While the effect of the tax and interest-rate cuts on consumer and business spending should be visible by fall, analysts note that the trade benefits from the large drop in the dollar in the last year take time to develop and are not likely to become apparent until this time next year, when they may add to the boom.

The Commerce Department reported yesterday that the current account deficit hit a record $136 billion in the first quarter, partly reflecting the high price of oil imports.

But spending on oil and gasoline has dropped precipitously since then.

“The outlook today is brighter than it has been at any time since the recession began in early 2001,” said John E. Silvia, chief economist at Wachovia Securities.

“Strong consumer spending, improved business investment along with the end of the deterioration of the trade deficit, and a modest rise in inventories will produce a sizable pickup in growth in the second half of the year.”

Mr. Silvia said he sees an array of reasons for the improvement, with no one taking all the credit.

“There is no silver bullet — no single factor that jumps out and screams stronger growth. The battle is being won on a wide front, one trench at a time,” he said.

Henry Kaufman, president of Henry Kaufman & Co., doubts the economy is headed for another boom, yet expects the big dose of stimulus and a more-realistic attitude in financial markets after the stock-market bust and corporate scandals of the last year will produce modest improvements.

“I remain cautiously optimistic that … a new financial sobriety, the fiscal stimulus coming on-stream shortly, and a less-doctrinaire and more-responsible monetary policy, will encourage moderate growth and avoid deflation,” he said, adding that “U.S. economic performance is likely to outpace that of most other developed nations.”

He criticized those who foresee a boom as “overly simplistic” in light of the difficulties the economy still faces adjusting in the aftermath of the 1990s stock-market bubble.

Mr. Kaufman sees little evidence that investors, businesses and lenders have been able to overcome their hangover from “financial excesses” to the point of being ready to pursue new opportunities with vigor again.

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