The Case for Economic Optimism

The great fear was that the shock of September 11 coupled with the insidious anthrax threat would cause American consumers to "turtle"--draw back into their shells and stop spending. The blows came as the economy was already weak and conventional economic wisdom predicted that people would lose confidence. War and recession, after all, make for gloom and doom. But just as surprising victories on the military front have given reason to be more optimistic about the war, there may be cause for hope about the economy: A number of "victories" on the economic front may add up to the beginning of the end to recession.

Here's the case for economic optimism. October retail sales bounced back from the trauma of September, proving conventional wisdom wrong: They rose 7.1%, more than three times what economists anticipated. Sales of autos, powered by zero-interest loans, were huge; clothes, building materials, and restaurants also did well. So the worst may be over. Consumer sentiment has turned around. The University of Michigan survey of consumer attitudes showed a strong rise so far in November. The dollar has stopped falling. It has gone up about 4% against the euro in the past two months. The stock market has improved: The S&P 500 is up 18% over the past eight weeks, and even battered tech stocks are rising. Most important, corporate earnings may be reaching bottom. Standard & Poor's estimates a 4.4% increase in third-quarter earnings per share over the second quarter. That's quite a lot of good news.

There's more. Rising interest rates and oil prices, which flattened the economy a year ago, are now in full reverse. Oil is down about 20% in the past two months and mortgage rates have fallen so far that they are near their 1950's lows, triggering a huge wave of refinancing. The money supply is strong, and businesses as well as families are reliquefying their balance sheets. Finally, productivity growth remains remarkably healthy, helping corporations to rebuild their bottom lines.

There's still bad economic news. Consumer confidence is fragile and could deteriorate with further terrorist activity. High-tech investment is dormant. The airline industry is in serious trouble. Japan is sinking into recession again. Deflation talk is in the air. And many stock valuations remain high by historic standards.

The one big question mark is the $100 billion federal stimulus bill that is still stuck in Congress. The politicians must get over their partisan wrangling and get the money flowing before the Christmas season begins. There is a good case to be made for economic optimism and, with any luck, it could get stronger.

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