After the Storms
What the hurricanes have left in their economic wakes.
12:00 AM, Oct 4, 2005 • By IRWIN M. STELZER
For one thing, higher prices of imported crude oil and greater reliance on imports of gasoline until U.S. refineries are fully operational will contribute to a greater outflow of dollars. For another, the approximate 10 percent rise in the dollar relative to both the euro and the yen will make American goods dearer overseas, and imported goods cheaper here, cutting exports and increasing imports. To fund the higher trade deficit, America will have to attract something like $80 billion per month from foreign investors, not impossible--but achievable only if they are offered higher returns on their investments. That means higher long-term interest rates, especially since the Fed intends to continue raising short-term rates, and a slowing of the economy.
So much for worries. Fortunately, the prospects for dispersal of the clouds hanging over the economy are relatively good. A survey by the National Association of Business Economists shows that its members expect the economy to grow 3.5 percent this year and 3.4 percent in 2006--a "solid expansion"--in part because they expect oil prices to drop to $63 by year end, and to $55 by the end of next year.
We do know that business spending was accelerating before Mother Nature expressed her displeasure with the Gulf Coast. In August, durable goods orders rose by 3.3 percent, after falling in July. Orders for non-defense capital goods, excluding aircraft, are the most-watched component of the durable goods series, as they are an indicator of investment in productivity-enhancing technology. Such orders were up over 12 percent from last year.
Finally, there is a good possibility that business spending will offset any decline in consumer spending. Thomson First Call, the authority in these matters, predicts that earnings for the companies in Standard & Poor's list of 500 large companies will be up 12 percent in the third quarter, 13 percent in the fourth quarter, and 9 percent in the first quarter of 2006. With sales rising, interest rates relatively low, and depreciation charges falling because of lower investment in recent years, cash flow is at record levels.
Now, if better weather, cheaper flat-screen television sets, and an easing of gasoline prices prevent the holiday shopping period from becoming a winter of consumers' discontents, forecasters might be scrambling to raise their growth forecasts by early next year.
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.