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The Balance of the Risks

The economic forecast is mostly sunny, with some clouds, and a chance of storms.

11:00 PM, Oct 27, 2003 • By IRWIN M. STELZER
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INTEREST RATES are not the only cloud on the economic horizon. China's soaring demand for oil, combined with OPEC's decision to cut back output, is keeping oil prices well above the target the Saudis continue to allege is their goal. Many worry that share prices are overvalued, or at minimum "that the market has fully discounted a very solid recovery," to quote former White House economic advisor Larry Lindsey. Excess capacity remains high, making price increases an impossibility and threatening profit margins since most cost savings have already been wrung out of the system. The collapse of the Doha round of trade talks means there will be no fillip to growth from increased trade. President Bush returns empty-handed from Asia, having failed to persuade the Chinese and Japanese to allow the dollar to fall against the renminbi and the yen, which would have brought America's trade deficit under control.

But these clouds do not a downpour make. Economic growth at anything like current rates should shine through, driving profits to levels that just might support something like current share prices, strengthen the jobs market, and reduce the deficit; and the absence of inflation should keep interest rates from rising to recovery-threatening levels. In short, "the balance of the risks," to borrow a term from the Fed, is tipped towards fair, rather than stormy, weather.

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.