Latest economic news is much brighter

Friday, June 20, 2003

The news about the U.S. economy is good one day, not so good another. This up-and-down trend has been amply demonstrated in recent days. Here are some sample headlines:

June 12: Fed detects signs of recovery.

June 14: Drop in producer prices revives prospects of deflation.

June 16: Economists debate if conditions are right for stronger growth.

Good news on prices tamps down deflation fears; factories raise production.

Clearly, keeping up with economic trends and forecasts these days requires a flexible neck in order to avoid headline whiplash.

Generally, however, economists are sounding more optimistic about current trends than they have for a long time. The momentum of such indicators is bolstered by investors who are having some of their confidence restored by healthy gains in stock markets.

One of the biggest fears for the Federal Reserve, whose fine tuning aims to keep the economy headed in the right direction, is deflation, an economically dangerous long-term slide in prices. At the same time, the Fed is equally concerned that nothing it does results in deflation's unwelcome counterpart: runaway inflation.

As one official put it, the Federal Reserve's policies should be aimed more at preventing deflation than causing inflation. Except for limited periods of falling prices at the end of the 1940s and in the mid-1950s, the nation's last period of serious deflation was during the Great Depression.

The Fed is expected to lower its federal funds rate -- the interest banks charge each other -- when it meets next week. The rate currently is at a 41-year low of 1.25 percent. The Fed could drop that rate another quarter- to half-percentage point.

There are a good many indicators that the economy is strengthening.

A recent survey of business conditions around the country showed that four of the Fed's 12 districts had signs of increased economic activity, and not a single district reported further deterioration. Lower mortgage rates have helped increase home sales and residential construction. New tax cuts are showing up in paychecks and are expected to spur consumer spending. The weakened U.S. dollar is making American-made goods attractive to foreign buyers. Falling interest rates are having a positive impact on several economic sectors. Manufacturers that shed more than 2 million jobs over the past three years are seeing indications of better times. Consumer prices held steady in the latest report. And big industry boosted production for the first time since February.

Perhaps the two most closely watched economic indicators for most Americans is how well their retirement portfolios are performing and how much more money is showing up in their paychecks due to tax cuts. In both cases, the recent news has been favorable.

Now that the initial phases of the war in Iraq have concluded and with a good deal of positive economic news, many forecasters are willing to predict healthy growth in the last half of the year that will speed up in 2004.

A little good economic news is welcome after three years of economic jitters.

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