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The U.S. economy expanded at a robust 5.8
percent during First Quarter 2002. This
rapid expansion in Real GDP was fueled by a number of factors that strongly
influenced household spending. Some
of the factors that provided a boost to consumer spending were: relatively low
interest rates on everything from autos to home mortgages; lower tax rate
structures which resulted in tax rebates and larger tax refunds; a warmer than
normal winter over most of the country; and relatively low energy prices over
the winter months. All the aforementioned factors helped to put more purchasing
power in the hands of consumers and give the economy a much-needed shot in the
arm. Household spending accounts
for approximately two-thirds of all economic activity and has a huge impact on
the nation's economy. However,
it must be noted that some of the factors mentioned will become less important
as time passes. For example, the
mild winter weather and low interest rates will not have a lasting effect.
Given the good news for First Quarter, there
remains considerable debate as to how strong the recovery will be, and if it
is sustainable. Consumers have
kept the economy afloat, though some of the items influencing consumer
behavior will abate in the months ahead.
Most analysts hold the opinion that for the economy to continue to grow
at a healthy rate, corporations will need to start investing once again in
factory, plant, equipment, and inventories, etc.
One must remember that the recession in economic activity was in large
part caused by a sharp cut back in business investment.
The retrenchment in business investment resulted from over capacity in
many industries, e.g. telecommunication.
The data now indicate, that excess inventories in the majority of
industries has been reduced to more optimal levels.
However, the question remains open to debate as to whether or not
business firms will now increase their investment activity, and provide
additional demand to the economy.
The consensus opinion is that business firms
will increase investment by the latter part of this year in response to
greater expected profitability. The
Federal Reserve has hinted in its pronouncements that, while the economy is
now expanding, the greatest danger still comes from a possible retrenchment in
economic activity, rather than from inflation.
This means that the Federal Reserve's bias is to keep borrowing rates
low, and provide ample liquidity for the nascent recovery.
Thus, it is quite unlikely the Federal Reserve will tighten money and
credit conditions until sometime later this year. Credit market conditions, like the aforementioned, bode well
for business profitability, and enhance the likelihood of increased investment
activity. In addition, there are
a number of other economic indicators for the U.S. that point toward a
continuation of the current recovery, and higher expected profitability levels
for corporations. Examples
include: a benign inflation rate; modest increases in employment; growth in
industrial production; an expansion in retail sales; and rising consumer
confidence. However, there are
some negative factors that also must be considered: the very real possibility
that increases in energy and health related costs will damper economic
activity; the fiscal problems facing approximately 40 of the 50 states will be
a drag on recovery; and least we forget, the political and economic
uncertainty emanating from events in the Middle East.
In
sum, U.S. and the state of Wisconsin should experience continued growth in the
number of jobs and in income levels. However,
it may well be into summer before the unemployment rates start to lower in the
U.S. and the state. Moreover,
Wisconsin is much more dependent on manufacturing than the country as a whole,
and is not an energy rich state. To that extent, Wisconsin's economic fortune is even more
closely tied to issues concerning overcapacity, business investment levels,
energy costs, and the general level of interest rates. |
