TCS Daily


The Strongest Economy You've Never Heard Of

By Pejman Yousefzadeh - December 9, 2005 12:00 AM

Did you know that the American economy is in recession?

Well, if you saw this poll (results released on November 23rd), you might be forgiven for thinking that it was, so widespread is the belief that the economy is performing poorly. According to the poll, "43% of Americans say they believe that the national economy is in a recession and 44% say they do not believe the economy is in a recession." Additionally, according to 50% of Americans sampled by the poll, "the national economy is getting worse." And if that's not enough, 63% of respondents say that the economy is "bad, very bad, or terrible."

Nothing could be further from the truth.

Consider this report, which was issued on December 2nd and which reveals the following about the economy:

U.S. payroll growth kicked back into gear in November, the government said Friday, in a report showing the labor market recovering from its post-Katrina weakness.

Employers added 215,000 jobs to payrolls last month, the Labor Department reported, up from a revised 44,000 in October. Economists surveyed by Briefing.com had forecast a gain of 210,000.

And consider this report about economic growth in the third quarter:

The economy grew at a lively 4.3 percent pace in the third quarter, the best showing in more than a year. The performance offered fresh testimony that the country's overall economic health managed to improve despite the destructive force of Gulf Coast hurricanes. The new snapshot of economic activity, released by the Commerce Department on Wednesday, showed the growth at an even faster pace than the 3.8 percent annual rate first reported for the July-to-September quarter a month ago.

The upgraded performance reflects more brisk spending by consumers and businesses as well as more robust investment on residential projects than initial estimates revealed.

"In anybody's book this is an outstanding performance for the economy," said Ken Mayland, president of ClearView Economics.

The third-quarter's showing marked a sizable pickup from the 3.3 percent increase in gross domestic product registered in the second quarter of this year.

GDP measures the value of all goods and services produced within the United States and is the best barometer of the nation's economic standing.

The 4.3 percent growth rate matched the performance posted in the first quarter of 2004. The last time economic activity was higher was in the third quarter of 2003, when the GDP soared at a blistering 7.2 percent pace.

The upwardly revised reading for GDP in the third quarter also exceeded the expectations of business analysts. Before the report was released, they were forecasting the economy to clock in at a 4 percent pace.

Consumers and businesses did their part to keep the economy rolling -- even as they coped with elevated energy prices during the third quarter.

When you are finished digesting the above information, take a look this report about continued strong home sales. Yes, the article says that this may be a "last hurrah" for the housing market, but we've heard that one before, haven't we? While the housing market may very well slow down sometime soon, it still appears to be going strong and even slowed, it can produce steady growth. Consider as well this report regarding increased consumer confidence thanks to a fall in gasoline prices (guess the greedy oilmen aren't as greedy nowadays, for some reason). Consider the fact that the shopping season is off to a robust start, and that this will only add to the strength of the American economy by giving us a strong and successful fourth quarter. And consider that all of this is occurring in the wake of Hurricane Katrina, and the devastation it was supposed to have wreaked on the American economy.

So why isn't the strong state of the American economy impressing the respondents of polls? Why hasn't it appeared to have seeped into the American consciousness that our economy is doing quite well?

Perhaps it has to do with the fear that soon, the other shoe will drop and economic growth will come to some kind of sputtering halt. To be sure, there are problems to be dealt with. As this report indicates, the federal budget deficit continues to be a problem (how much of an effect it will actually have on economic growth, job creation and a hot housing market is debatable, but people like me think that responsible spending is a sign of fiscal sanity and prefer it to the alternative). While the Federal Reserve is clearly on top of inflation concerns and while continued rate hikes should keep inflation under control, higher prices could conceivably threaten growth. And external events like an avian flu pandemic could certainly serve as a threat to the health of the economy.

But at any period where the economy is growing, there are factors out there that could curtail growth or bring it to an end. It doesn't change—and should not put a damper—on the fact that economic growth is occurring and that the growth is quite robust.

The underreporting of the strength of the American economy reminds us that any good news needs people to spread it and sell it. The Bush Administration—which would certainly profit politically if more people knew about the strength of the American economy—has been strangely silent in spreading the repeated tidbits of good news regarding the economy. Of course, the ability of a President of the United States to manage the economy is, in fact, quite limited, but political popularity for an administration correlates quite strongly with the perceived performance of the economy. It's anyone's guess why the Administration chose to forget this important political lesson, but one of the consequences of its lapses of memory is that few people actually know that the economy is doing well. Imagine just how strong consumer confidence might be if more people were aware of the economy's healthy state.

The media is also needed to sell the strength of the American economy, and it has largely been AWOL on this issue. If memory serves, the media was all over the economic boom of the 1990's. Perhaps that is because the Clinton Administration did a better job of identifying itself with the economic boom and did better as well at steering the media towards gushing coverage of the economy. But whatever the case, the media need not wait for the Bush Administration to sing the praises of the current economic boom before lending some more coverage and commentary to it. They could do that on their own. Aren't journalists supposed to have some sense of initiative, after all?

Maybe their sense of initiative is manifested in a resolution to find the dark cloud that accompanies each silver lining. Brian Wesbury, an investment strategist, outlines the bizarre media coverage of the economy:

During a quarter century of analyzing and forecasting the economy, I have never seen anything like this. No matter what happens, no matter what data are released, no matter which way markets move, a pall of pessimism hangs over the economy.

It is amazing. Everything is negative. When bond yields rise, it is considered bad for the housing market and the consumer. But if bond yields fall and the yield curve narrows toward inversion, that is bad too, because an inverted yield curve could signal a recession.

If housing data weaken, as they did on Monday when existing home sales fell, well that is a sign of a bursting housing bubble. If housing data strengthen, as they did on Tuesday when new home sales rose, that is negative because the Fed may raise rates further. If foreigners buy our bonds, we are not saving for ourselves. If foreigners do not buy our bonds, interest rates could rise. If wages go up, inflation is coming. If wages go down, the economy is in trouble.

With coverage like that, I guess it should come as no surprise that more people think the economy is in trouble. Fear not, however. The economy is doing fine. It's just information gathering and distribution regarding the state of the economy that's in trouble.

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