- The Washington Times - Thursday, June 12, 2003

Determining when growth turns to contraction or economic growth begins to accelerate is best done by looking in the rearview mirror. That’s because much of the evidence of a turning point in the business cycle tends to be cumulative over time, with contradictory information often the norm at the outset. That appears to be the case today.

Earlier this month the Institute for Supply Management (ISM) offered the first postwar data for May. Its manufacturing index jumped a solid 4 percentage points, rising from 45.4 percent in April to 49.4 percent. A reading below 50 percent indicates a contracting manufacturing sector. Manufacturing activity, however, suggests that the pace of contraction experienced during March and April had slowed considerably last month, perhaps reaching the cusp of a resumption of expansion in that important sector.

The ISM’s non-manufacturing index for May jumped to 54.5 percent from 50.7 percent in April, indicating faster growth. Of the 17 business sectors included in the non-manufacturing index, 12 reported increased business activity, with transportation, utilities, construction, mining and finance and banking registering the highest growth rates. Three sectors reported decreased activity in May (agriculture, insurance and wholesale trade), and two sectors reported no change in activity compared to April.

The Federal Reserve on Wednesday added to the string of seemingly inconclusive data for May when it published its Beige Book, which provides a survey of business activity across the central bank’s 12 districts. On the plus side was the fact that no district bank reported that business activity had deteriorated since the last Beige Book, which reviewed activity from late February through April 15. On the negative side, the Fed reported that “conditions remained sluggish in most districts” and described consumer spending as “lackluster overall.” The Fed said the outlook for consumer spending was “cautiously optimistic.” In contrast to the ISM’s non-manufacturing index, which reflected accelerating growth, the Fed’s survey of the service sector in May suggested “sluggish activity overall.” Despite the fact that the unwinding of war-related concerns boosted business and consumer confidence, “the effect has not been dramatic,” the Fed observed. Retail sales rebounded in May, the Fed reported, but they still remained below year-earlier levels. Manufacturing activity was also mixed.

Yesterday, the Commerce Department reported that retail sales for May increased 0.1 percent after declining 0.3 percent in April. Even more favorable, if inconclusive, data came from the Labor Department, which reported that the number of initial claims for unemployment benefits fell by the largest amount in four weeks.

In the face of all of these mixed reports, it’s not clear that the economy has reached a point where growth will finally begin to accelerate to a sustainable pace. That is why the recently passed tax-relief bill was so necessary and why, at its next meeting, the Fed needs to further reduce short-term interest rates.

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