The Long Hot Summer

THE LONG HOT SUMMER

By

?David L. Blond

This was first published in August 2002 in the Manufacturer Magazine, but I think it speaks for itself as to how somethings change and some things just stay the same!!!

Perhaps it is the heat, perhaps the exhaustion of this past year, but the economy has not yet found traction.?It appears to be in a holding pattern, waiting to pass through different milestones.?Yes, we made it through July 4th, but the anniversary of September 11th looms large.?Can anyone remember the euphoria of 1999 and 2000, when almost any kid could dream of becoming a multi-millionaire??

One part science, one part psychology, is what drives the economy. Economic models cannot integrate both into their mathematical designs, although economists do often use surveys of business leaders and the monthly consumer confidence index to guide forecasts.??Both indicators suggest an uncertainty about tomorrow.?This confusion has led to inaction - by business - and to a roller coaster ride of expectations.?The Dow has fallen from over 11,000 to 9000 and is tracking lower.?The NASDAQ erased $ 2 trillion in paper wealth.?The ratio of wealth to income that reached 5.5 in 2000 has risen to just under 4.5 to 1.?While the unemployment rate has held steady at just under 5.9%,?the economy, which previously generated large monthly increases in employment, is adding few new jobs.?Consumer spending has, however, held up well, helped along by lower interest rates and almost no price inflation.?Things are not as bad as they feel.?

I ran into a colleague at a party last week.?Rodney has the unenviable task of tallying the Current Account for the U.S. government.?For the last few years trade and current accounts have been hemorrhaging dollars, reaching 4% of GDP.[1] ?Foreigners continue to flee Wall Street, drawing money out at a rapid rate and, in the process, driving up rates on the euro and yen. Accounting scandals and poor prospects for profit growth have held investor optimism in check. Rodney believes the market is headed south, the dollar to new lows against the euro and yen. He’s shorted the dollar,?betting on more negative sentiment to make him a rich man.?

The irony is that foreign markets are as weak as American markets; Japan and Europe are both dependent upon exports to generate growth. The weaker dollar helps American companies by making American goods cheaper and, in theory, imports more expensive.?I believe there is a rule of one price that dominates exchange movements.?A weaker dollar will likely cut into profits earned on export sales, rather than raise prices in the huge American market.?

?The summer is no time to take stock of the future. We must pay attention to heat, humidity and code red days, to severe drought, raging forest fires and horrific flooding – and, to a tension that is evident almost everywhere.?Business is the key to growth, but business has been burned by too much laxity in accounting for profits.?Stock prices have been impacted by the failure to meet Wall Street’s overly ambitious expectations.?The long boom conditioned the markets to expect 10-15% profits. With consumer spending growing at no more than 3-4%, it takes mighty creative accounting to meet those targets.???

It is no wonder that Chief Executive Officers are cautious.?They are in the unenviable position of having to decide if tomorrow will be better than today. While business confidence indicators have gradually improved since their lows, there is no real consensus about the future. Until that consensus builds the world will remain in a summer holding pattern.?

This brings me back to the role of psychology - a new area of interest to economists.?September 11th was tragic for the nation. The goose that laid all those golden eggs was already unhealthy and the gold leaf was fading. The further tragedy of September 11th was that it killed optimism.?In the late 1990’s everything seemed possible and the American economy was pulling the world along towards a bright tomorrow.?Life was good.?

Economists can look at graphs and search through statistics to see why the economy is not performing as expected.?The real truth is that we do not know what is right and what is wrong anymore.?Rodney may be on to something.?Short the market, short the dollar, look at the downside. Maybe.?I know that summer is followed by fall.?I look forward to cooler days, cleaner air and a change in attitude.?Life will return to the sidewalks of our cities, to the market and to the economy.???.????????

[1] Account for the current account is likely flawed since the world current account is in deficit which should be impossible.