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Too Many Numbers, Not
Most of the time in economics, we wish we knew more. When trying to forecast
the U.S. economy, though, the problem is too many numbers.
The St. Louis Federal Reserve provides a lot of free data about the economy.
You can see it on the Web at http://research.stlouisfed.org/fred
(no "www"). How many numbers? I count 456 different measures
of economic activity--everything from gross domestic product (GDP) to
the interest rate on conventional mortgages to the exchange rate between
the dollar and the Malaysian Ringgit.
Even if you could look at all the numbers, you'd never be able to keep
them in your head all at once. So let's pick a few that stand out. The
ratio of inventories to sales is as low as it's been in 30 years. Capacity
utilization is as low as it's been in 20 years. The mortgage interest
rate is as low as it's been since we started measuring it.
Inventories pile up in recessions. Businesses stock their shelves for
future sales, then sales don't grow as fast as expected. With all that
inventory, there's no point in producing more goods, so factories shut
down and workers are laid off.
The inventory-sales ratio measures this effect. The ratio rose for most
of 2000, then in 2001 the recession started. During recessions, the ratio
falls as businesses sell their stock of goods. The inventory-sales ratio
started to fall in October 2001. Now, the ratio is as low as it's been
since 1973. There's not much stock left to sell. That means goods sold
in 2003 will come from factories, and that means more production.
Businesses got pretty excited about sales prospects at the end of the
1990s. Not only did they stock the shelves, they built offices and factories
and bought equipment to go in them. Now, a lot of that capacity isn't
being used. The capacity utilization rate says that only 76 percent of
the nation's office and factory capacity is in use. That's the lowest
rate since 1983.
With inventories so low, more of this capacity will be used in 2003.
That's good for recovery. But a full-blown expansion can't happen until
businesses start building more factories and buying more equipment. They
won't do that until they're using what they already have. Business investment
in plants and equipment probably won't grow much this year.
Interest rates are low. The monthly average mortgage rate in December
was 6 percent. That's the lowest rate in the whole data series, going
back to 1971. Housing construction has been booming, and low mortgage
rates are the main reason. Low rates let automakers offer those zero interest
deals, too. With interest rates still low, it's sensible to think that
housing construction will keep growing. So will spending on consumer durable
goods like cars, appliances and furniture.
But the Federal Reserve sent a message in November, the last time it
cut interest rates. The Fed said the future threat to the economy was
balanced between recession and inflation. It had been saying that recession
was the main danger. The Fed cuts interest rates to fight recession and
raises rates to fight inflation. This change in expectations probably
means that the Fed is done cutting interest rates. Interest rates won't
fall much further.
What will make the economy grow in 2003? Purchases of inventories, housing
and consumer durables and spending by the federal government on national
defense. What will hold it back? Stagnant business spending, state and
local government budget cuts and tax hikes, and slow growth in exports
to the rest of the world. Taken all together, it looks like GDP will grow
about 2.5-3 percent.
That's not fast enough to bring the unemployment rate down, so it will
stay around 6 percent. It's not fast enough to increase inflation, either,
so it will stay around 2 percent. A war with Iraq would probably raise
oil prices, at least for a while, and that could cut growth and increase
That's the story the numbers tell. It's not the kind of expansion that
we'd like to see--that probably won't come until 2004.