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The Economy's Steroid Problem?

Is the surging economy headed for a post-election crash, or is sustainable growth in the cards?

12:00 AM, May 11, 2004 • By IRWIN M. STELZER
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"THE ECONOMY IS ON STEROIDS," an administration official told me last week, before the latest jobs report was released. The April jobs report, released late last week, certainly supported that view, at least as to the growth rate. The economy added 288,000 jobs last month, well above the 150,000 most economists were expecting. The frosting on the cake was an upward revision of the previous month's report, from 308,000 new jobs to 337,000. If the economy continues this performance, more than two million new jobs will be created by the time voters go to the polls in November.

Bad news for the president's critics. They say that an economy on steroids might be growing, but it is excessively dependent on an artificial and unhealthy stimulus. The steroids being administered to the economy include a federal deficit that exceeds 4 percent of GDP, a trade deficit running at 5 percent of GDP, derisory interest rates, and tax refunds that are keeping consumers in the shops.

None of these steroids can be taken for long without producing a serious reaction--runaway inflation. The federal deficit will force investors to demand higher, growth-stifling interest rates from a government that will drown in red ink when the aging Baby Boomers demand their pensions. The trade deficit is also unsustainable, say the worriers, because foreigners won't forever accept little bits of paper with pictures of American presidents on them, in return for automobiles, sneakers, and other goods. They will drive the value of the dollar down, making it worth less and stimulating inflation.

The low interest rates that have fueled consumer and corporate borrowing, and helped share prices to levitate, are also soon to be a thing of the past, as Federal Reserve Board Chairman Alan Greenspan has warned. Rising interest rates will discourage debt-ridden consumers from shopping and buying new homes. Finally, supplies of the final steroid, tax cuts, have been exhausted.

WITH THESE ARTIFICIAL STIMULANTS REMOVED, the economy is headed for bad times. To which cynical Republicans reply, "Yeah, but not before the November elections." More responsible analysts have a different answer: The economy's strength does not depend on artificial steroids and the problems that have administration critics in full cry will be corrected without causing much more than a blip in the upward trajectory on which the economy is launched. Interest rates will rise, but not so much as to bring growth below 5 percent.

Consider these facts: The service sector is growing at its fastest rate in seven years; the manufacturing sector is on the rise; profits are growing at double-digit growth rates; consumer confidence is high; new and existing home sales were up by 8.9 percent and 5.7 percent, respectively, in March; and retail sales continue to grow, especially in high-end shops.

Even New York City's hard-hit economy is recovering. The city's key financial services companies are scrambling to add staff; restaurants are heavily booked; and for the first time my hotel of choice is fully occupied. On the Fourth of July, ground will be broken for the highest of the towers to replace the two destroyed on September 11, and in August the economy will receive a further fillip when thousands of free-spending Republicans descend on New York to re-nominate George W. Bush.

This city boomlet cheers the media types who dominate television and print reporting to the nation. With the value of their co-ops rising at a rate that even the greediest must consider satisfying, and their friends finding jobs, they have turned bullish, and are radiating optimism to the rest of America.

The development that has economy-watchers most worried is the price of oil, which broke the $40 barrier last week. Supplies remain tight as Saudi Arabia continues to shut in some two million barrels per day of potential output, while at the same time hypocritically proclaiming its continued fidelity to a $22-$28 price range. Venezuela's output is about 500,000 barrels per day below normal levels, and other countries are producing about all they can. Demand, meanwhile, grows as China sucks in imports, Japan returns to sustainable growth, and American motorists remain impervious to soaring gasoline prices. Government sources, which have been predicting that prices will return to the $30 range, are about to retreat from that view, and up their guess to $35.

Add to these price pressures a rising risk premium. Threats to the northern pipeline make it imprudent to count on Iraq to continue exports at current levels of 1.8 million barrels per day. More important, terror attacks in Saudi Arabia have increased uncertainty about the durability of the House of Saud. Should Saudi exports be interrupted by terrorists, prices will certainly soar, even if American forces intervene, as is most likely.