Wobbling...

WITH world stockmarkets—and political America—still reeling from a long list of corporate scandals which have destroyed some of the country’s biggest companies, there was at least one comfort: America’s economic recovery seemed strong. Until this week, that is. Now that reassurance, too, has been brushed aside. Figures released on August 1st showed an unexpectedly sharp rise in jobless claims for the previous week. A manufacturing survey from the Institute for Supply Management, also released on August 1st, was also disappointing: manufacturing activity, according to the survey is still rising, but only just. And labour market data published on August 2nd confirmed the impression of an economy struggling to pick up momentum. These figures seemed to confirm the most dramatic figures, which had been published by the American government a few days earlier. These showed that the economy had grown much more slowly than realised in the second quarter of this year—by only 1.1% at an annual rate. Separately, survey data published by the Federal Reserve on the same day supported the impression of a slowing, and even faltering recovery.

Compounding the gloom are the revisions made by government statisticians to earlier figures. It now turns out that last year’s recession was significantly worse than previously estimated, and growth in the first three months of 2002 a bit less impressive than earlier statistics had indicated. The backward changes will mean a downward revision to America's spectacular productivity figures and cast further doubt on the “miracle” of the new economy.

The new figures are a blow to hopes that America’s economic recovery is well established. Suddenly, the recovery looks weak and the economy looks vulnerable to further shocks. The determination of American consumers to keep spending has bolstered the economy for so long. If consumers should now lose heart, as some recent surveys suggest they might, all bets will be off. Another downturn—a so-called “double-dip” recession—would then be highly likely. With Europe and Japan still in the doldrums, the forecasts of steady global growth this year could soon look overly optimistic.

The latest figures, though gloomy, are not all bad. Business investment is still falling, but at a slower pace than before. The one, very modestly encouraging sign is a small upturn in investment in computer equipment and software, though this comes after nearly two years of decline. Consumer spending grew more slowly in the second quarter than the first, though fortunately it is still growing, at an annual rate of 1.9%. And despite recent surveys showing a decline in consumer confidence, there are plenty of signs that consumers are still spending on cars and houses, as well as on smaller items. Retail sales in May, the latest month for which figures are available, were up nearly 5% on the previous year, in volume terms. With car makers reviving low and zero-interest deals, some analysts now expect July to be the best month of the year so far for vehicle sales. And one of the technical reasons for the weakness of the latest GDP figure is a boom in imports, which were up by 23.5%, the largest rise since 1984 (exports rose at only half that pace). The weaker dollar should encourage more Americans to buy home-produced goods in future.

So the picture remains mixed, but the risks of another downturn seem greater than most economists thought they were just a few weeks ago. The latest figures are, of course, a record of what has already happened to the economy, up to the end of June. They cannot offer a clear guide to what is happening now; and significantly they exclude the last few weeks which have seen near-panic in the stockmarkets and big falls in share prices. That is where the Fed's latest survey, or “beige book” can help fill in the picture. It comprises anecdotal evidence from the twelve district Federal Reserve banks spread across America. And it makes dismal reading, providing a significantly gloomier assessment of what's happening to the economy than the previous survey published seven weeks ago. Barely half the district banks, for example, reported an unambiguous expansion in manufacturing.

There is, though, still no clear evidence about the impact on consumers of the latest market volatility, which has itself posed a challenge for the authorities. After the latest setback, few economists expect to see a rise this year. Though American interest rates are now at their lowest level for the past 40 years, some economists have speculated that the Federal Reserve, America’s central bank, would cut them still further to try to calm the markets and stabilise the economy. The latest GDP data is likely to revive such speculation in the short term.

The Fed’s next scheduled meeting to review interest rates takes place on August 13th. A further cut still seems unlikely, for two main reasons: first, it might smack of panic, and thus be counter-productive by fuelling fear and uncertainty; and second, with interest rates already so low, the Fed will probably want to retain what ammunition it still has, in case the economy is faced with a further unexpected shock, such as that on September 11th last year. But it is difficult to predict with much certainty what the Fed will do next. Alan Greenspan, the powerful Fed chairman, plays his cards close to his chest.

One man likely to be especially concerned by the latest figures is President George Bush. His approval ratings have already taken a knock after the revelations of corporate malpractice and accounting fiddles at companies like Enron and WorldCom. Mr Bush has been struggling to regain the initiative for action from a Congress determined to clamp down on such activities; some voters perceive the president as having closer ties to big business than is desirable.

A sluggish economy is therefore a huge headache for Mr Bush, and his Republican Party. Control of both the Senate and the House of Representatives now look up for grabs in the mid-term elections in November. If the Democrats gain clear control of either, Mr Bush will find his ability to get much done in the second half of his presidency drastically reduced. If on top of this, America’s economy is weak, or in recession, his own re-election in 2004 could be threatened. Everyone in the Bush administration, not least the president himself, is painfully aware of his father’s failure to get re-elected, for which most blame the recession of the early 1990s.

Mr Bush has already presided over the disappearance of the huge budget surpluses projected when he first took office. For a time it looked as if he might narrowly escape being politically damaged by the economy, with the mildest recession on record and a swift and steady recovery. At the very least, the latest figures suggest that he can no longer count on either of these.

Interest rate adjustment by the Fed works when capital investment is available; yet currently it is not, thanks to the omnipresent pollen of federal intruders about and within the workplace, driving our productive capacity away and offshore.

How government may "control" the economy in the short run, has proven to be both a failure and unavailable as a tool: interest rate adjustments.

Leaving that behind, what's next?

Tax cuts:

End the Long-Term (one year or more) Capital Gains Tax.
No reporting of Gains nor of Losses, for this year, and henceforth.
The country sorely needs the breathe of fresh, long-term investment, especially as a form of savings.
End income-taxes on pass-book savings accounts.
Begin a phase-out tax rate for seniors' interest income; as they get older, they pay a lower and lower income-tax rate on their interest income.

These cuts would give us a lot of relief for this year; we need an injection to kick start whatever savings we can promote; because people need something upon which to balance the costs of their taking risks.

We are in bad shape when there is little or no operating capital to fall back upon for production, but more so when there is little or no more liquidity of the people.

We hear speeches about "liquidity;" it's a word tossed 'round quite a bit by "higher-ups." Yet when we are forced by tougher times to examine the peoples' liquidity, just by needing to know, that tells you something, and then there's the actual reading of the figures: There is no money left.

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