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In the recent events looming over the economy the technology stocks plummet, the possibility of engaging in a war with Iraq, and sales expectations for a not so Merry Christmas, many speculate where the economy is, and where it is headed. Are we primed for another surging growth, as we have seen prior to the stock plummet and corporate scandals or are we headed for a possible deflation?
There are many indicators which provide a general incite into the current state of the economy and its expectation. The main indicators are the gross domestic product, the unemployment rate, inflation, and consumer confidence, which plays a large role in consumer spending.
The primary measure of growth is the gross domestic product (GDP). On October 1, 00, the Commerce Department released a report stating that the gross domestic product rose to a rate of .1 percent in the third quarter, compared to just a 1. percent for the second quarter. This growth in the GDP, although an improvement from the second quarter, was lower than the expected growth rate of .6 percent, which was projected by many analysts. While most economists predict that there is little threat of deflation, there are many omens that would indicate otherwise. According to Morgan Stanley chief economist Stephen Roach, "the gross domestic product…grew just 0.8 percent year-over-year in the third quarter of 00 the lowest rate since the second quarter of 150" (Gongloff). This fact, in addition to the slowing growth should prompt economists to keep the reality of deflation in mind in the near future. (Gross)(Gongloff)
The force pushing the GDP this past quarter was a 4. percent growth rate in consumer spending, which accounts for more than two-thirds of the total economy. Although, many analysts do not expect this trend of spending to keep up, since much of the growth in the third quarter was attributed to auto sales "fueled by aggressive automaker incentives such as zero-percent financing"(Q).Also playing a large role in the expectations of spending for the fourth quarter are worries about the engagement of war with Iraq, and the recent report from the Conference Board pertaining to consumer confidence, which "plunged to its lowest level in nearly nine years…posting its most dramatic decline since the September 11 terrorist attacks" (Gongloff). The report indicated a drop from an index of .7 to a discouraging 7.4, much lower than the projected index of 0. This new release makes it the fifth straight decline for the index. Many aspects contribute to the consumer confidence, but one that plays a pertinent role in this index is the unemployment rate.
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According to The Labor Department, unemployment rose to 5.7 percent in October from 5.6 percent in September. The labor market not only plays a crucial role in consumer confidence, but ultimately contributes much to consumer spending also. Employers have attributed the labor market to the uncertainty of the economy, the teetering market, and the possibility of war with Iraq. Although there isn't all bad news in this market; average hourly earnings rose 0. percent, roughly cents, to $14.8. (Gongloff)
The consumer price index, an index which details retail prices paid by consumers for a basket of goods, is also expected to take its toll on the consumer spending. The Labor Department reported a rise in the index of 0. percent after rising 0.1 percent in July. Though even with the economy in its current state, many economists, such as Bill Cheney, do not worry about the possibility of inflation. (U.S.)
From all these indicators, it seems that the economy is at a standstill, it has, according to Federal Reserve Chairman Alan Greenspan hit a "soft spot." With consumer spending dwindling and weak business spending, the economy could head in either direction. So, what is the next move? After lowering interest rates to 40-year lows, many believe that Greenspan may have "run out of ammo"(Greenspan). This is far from the truth, because during a press conference held Wednesday, Greenspan said the Federal Reserve would not falter to cut rates again if it was to face continuing weakness. But, this is not the only move the Federal Reserve can make in boosting consumer spending, which provides for more than two-thirds of the economy. The Fed can buy short-term government bonds, which could start a chain of events; increasing the demand, and therefore price for the bonds, pushing rates lower. Banks, in response would cut their interest rates, which would encourage spending and investment from consumers and firms. When these short-term solutions are spent, long-term bonds could be bought to push their rates lower. (Greenspan)(Gongloff)
Another action that could be undertaken is to increase the money available to banks and investors. According to Federal regulations, for every dollar at the bank, the bank may use a percent to buy products and make loans, and the remaining must be kept in deposit. The Fed can increase the money available to the banks by reducing the amount that must be kept in reserve, thus increasing the availability of money for qualified candidates to loan. Increasing the money available to investors is also performed by the Fed. This is performed by regulating the amount of stock they can buy on credit, or "margin." (Gongloff)
A final drastic attempt to boost the economy that can be made is to target a higher rate of inflation. This type of strategy, when implemented during times when interest rates and inflation are very low would increase the cost of holding on to money than spending it. (Gongloff)
From all this information, it seems that an assessment of the current states of the economy cannot be made, nor can expectation on the future of the economy be made with accuracy. With the unstable nature of the current market, the forceful cut of the interest rate, and the prospect of war with Iraq and the War on Terror already underway; the economy could head in many directions.
Works Cited
Collins, Meghan. "Investors not scared Markets shrug off disappointing GDP, jobless claims data as talk of Fed rate cut persists." CNN 1 Oct. 00. CNN/Money. Online.Nov. 00.
For Q economic growth stronger GDP, broadest gauge of U.S. economic vigor, grew .1% in third quarter but was less than expected." CNN 1 Oct. 00. CNN/Money. Online.Nov. 00.
Gongloff, Mark. "Consumer confidence plunges closely watched measure of consumer confidence is dramatically worse than expected in October." CNN Oct. 00. CNN/Money. Online. 5 Nov. 00.
Gongloff, Mark. "For the Fed's next trick…when Alan Greenspan runs out of rate-cut ammo, there are tricks he can try to help the economy." CNN 1 Nov. 00. CNN/Money. Online. 1 Nov. 00.
Gongloff, Mark. "For Unemployment edges up U.S. labor market stumbles on road to recovery as employers cut more jobs in October." CNN 1 Nov. 00. CNN/Money. Online. 5 Nov. 00.
Gongloff, Mark. "The Fed's deflation dread this week's dramatic rate cut may have been made with an eye towards Japan." CNN 7 Nov. 00. CNN/Money. Online. 7 Nov. 00.
Greenspan Economy in 'soft patch' Central bank chairman cites fears about war in Iraq, decline in stocks, slower consumer spending." CNN 1 Nov. 00. CNN/Money. Online. 1 Nov. 00.
Gross Domestic Product Third Quarter 00 (Advance)." Stat-USA 1 Oct. 00. Online.Nov. 00.
U.S. consumer prices edge higher key inflation gauge a shade higher than expected in August but no threat seen; trade gap shrank." CNN 18 Sept. 00. CNN/Money. Online. 7 Nov. 00.
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