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ECONOMIC WEATHER OUTLOOK: IMPROVING, BUT STILL CLOUDY

NEW YORK -- Just how real is the recovery?Economic, retail and political reports have been fairly upbeat lately -- Saddam Hussein has been captured, and the Dow crested 10,000 last month for the first time in a year and a half -- and consumers are being bombarded with a lot of good reasons to start spending again. Yet, there are those who believe the United States is still suffering from an economic

NEW YORK -- Just how real is the recovery?

Economic, retail and political reports have been fairly upbeat lately -- Saddam Hussein has been captured, and the Dow crested 10,000 last month for the first time in a year and a half -- and consumers are being bombarded with a lot of good reasons to start spending again. Yet, there are those who believe the United States is still suffering from an economic hangover triggered by the 2001 recession.

In other words, it's going to take some gargantuan efforts to get the economy back in shape. Although high unemployment rates have begun to retreat, consumer confidence as measured by the Conference Board is high, the gross domestic product continues on the upswing, and 2004 is a presidential election year, there are still plenty of people who have lost their jobs, whose unemployment benefits have run out, or who are marginally employed and not making nearly the salary they used to.

Consumers may be spending, but they're looking for the best deals they can find. The key is whether consumer spending will maintain its pace since it has been the bulwark of economic growth for more than a decade.

Consumer spending is responsible for two-thirds of all economic activity, as measured by the government's chief economic indicator, the gross domestic product. There's really no debate the economy has improved since the recession in the third quarter of 2001, which saw GDP drop by 1.3%. In the third quarter of 2003, GDP -- or total consumer and business purchases of goods and services -- increased 8.2% to $11.2 trillion, after a 1.4% rise in the first quarter and a 3.3% increase in the second quarter.

While no one interviewed expects the third quarter's pace of consumer and business buying to be sustained, economists are largely positive about the GDP marching well into this year at a growth rate between 4% and 6%. It appears to be the duration, or depth, of the economic improvement that's dividing forecasters.

Those with less rosy outlooks tend to give more weight to such things as the ballooning federal debt of $500 billion as cause for questioning whether there's a true economic recovery under way. To service the debt, money is borrowed. It's sucked in large amounts from the global monetary system, which skeptics argue threatens interest rate hikes after more than two years of 45-year lows.

Robert Reich, former Labor Secretary under the Clinton administration and now a professor at Brandeis University, said government economic indicators don't provide an adequate picture of the overall decline in the quality of life for typical families, an economic deadweight.

"You don't have to be a rocket scientist to conclude that apart from the [improved] job situation, the typical family is struggling," Reich said. "They are working many more hours than 25 years ago, and that means more child care and commuting expenses, the cost to hire someone to clean your house or to find time to clean the house yourself.

"All the indicators to me suggest we are far from being out of the economic woods," Reich said, noting that during the recent holiday season, shoppers seemed to be seeking out the best deals they could find. "They want their dollars to go a long way, and big-box retailers are offering good deals. I expect retailers and their suppliers will be under more and more pressure to cut costs."

Ken Goldstein, an economist with the Conference Board (the economic analysis concern well known for its Consumer Confidence Index), readily said economic forecasting has an element of "guesswork." However, "that's not to say we're just throwing darts against the wall. There are reliable indicators to see what's going on. There are ways to take the pulse of the economy."

The Confidence Index measures consumer expectations about the availability of jobs, future purchases and general outlook for business conditions over the next six months. Since September, the monthly index, based on interviews with 5,000 households, has been on the upswing. In November, it was at its highest level since the fall of 2002. "Certainly, consumers think we have weathered the worst and the economy will get better, at least for the next six months," said Goldstein.

Then there's the issue of whether the economy is generating enough jobs to sustain the growth in consumer and business spending. For example, in November, only 57,000 new jobs were created as the unemployment rate dipped to 5.9% from October's 6%. To just keep up with population growth, the economy has to generate between 110,000 and 150,000 new jobs a month, according to economic theory.

Sara Johnson, an economist with Global Macroeconomics Group, which follows consumer markets, has a positive economic outlook. She scoffs at the idea of the United States undergoing a recovery without creating jobs, a phenomenon feared by economic-recovery skeptics. She said the strong GDP and increases in manufacturing orders are giving employers confidence to bolster payrolls. "Businesses have delayed hiring, and we have pent-up demand for new workers," said Johnson.

Johnson said consumers "are generally more confident, in part because they see an improvement in the job market, and inflation and interest rates are low." Johnson also highlighted another indicator: improvements in stock and mutual fund portfolios. "We estimate households have recovered about 90% of the loss of net worth they incurred" during the 2000-2002 stock market downturn that slashed the value of investments by $5.1 trillion.

Steve Spiwak, an economist with Retail Forward, Columbus, Ohio, said a rebound this year in business investment, which "drives hiring decisions," is a good sign the economy is emerging in good health. Spiwak also noted a recent upbeat report by the Institute of Supply Management that showed its November manufacturing activity index reached its highest level in 20 years, which bodes well for hiring.

The manufacturing sector has been in the doldrums for three years, having shed more than 2.7 million jobs.

"There are some signs out there that while the labor market is still struggling, it is coming back," said Spiwak, characterizing his economic outlook as "tempered optimism" in the short term.

One of Spiwak's worries is that consumer debt is hovering near record highs. In the early 1990s, consumers pared their debt load, leaving room for credit card spending. Excluding mortgages, consumers in the second quarter shouldered $728.4 billion in credit card and other loans. Although that was down about $10 billion from 2002, consumer debt hasn't retreated from its gradual upswing since 1998, when it stood at $586.2 billion.

"There is less leverage for consumers to tap credit in order to go out and buy stuff," said Spiwak. "That's a big worry. If the job market doesn't kick in soon, the debt worry could become a bigger problem. Debt loads are still very high historically, and the recent job gains won't be enough to offset them."

Of course, the health of the economy is a key political issue, and the Bush administration is happily touting all the recent good economic news while laying groundwork for the president's reelection contest. The president has already made friends with retailers with his 2001 and 2003 tax cuts totaling just under $2 trillion. Retailers readily credit the infusion of cash in the economy as contributing to pumped-up sales.

However, Democrats see a much shakier picture, and party candidates on the presidential campaign trail often paint Bush as creating stimulus simply through a line of credit provided by Congress, which of course helped stoke the $500 billion federal debt accumulated during the Bush presidency. Democrats maintain the effect of the president's tax cuts will start to wane into next year and, without a much larger increase in hiring, economic growth will also dissipate. In addition, as they see it, traditional means of jump-starting the economy, like lowering interest rates, can't be deployed since interest rates are already at historical lows. The minutes from the most recent Federal Reserve Board meeting indicated that, because of continuing low inflation, it is unlikely interest rates will have to increase much before 2005. Real disposable personal income was up 3.2% in 2003 vs. 2002, largely due to mortgage refinancings and tax cuts, according to the Commerce Department. However, living costs are rising faster than real wages.

Carl Steidtmann, chief economist with Deloitte Research, believes the economy will continue on a healthy path. He said he pays particular attention to two economic indicators: the slope of the yield curve in the bond market, which is "quite steep," and initial unemployment claims, which have been down.

"It's very rare for an economy with this momentum, unless some unforeseen shock to the system occurs for it to fall back," Steidtmann said. "There is a self-reinforcing aspect to the economy."

Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates, believes spending power isn't what it used to be. "It was unrestrained before 9/11, and the luxury business was going up, up, up. Now it's more realistic. People are not betting the ranch by spending all their money. People have been snake-bitten, and have to pull back. There are not too many people who don't have family members or friends not going through unemployment. People think it could happen to them. The quality of employment is different. People in part-time jobs qualify as employed, and people who are making less money [than they used to] are still employed. It's not just the quantity of unemployment, it's the quality of employment," he said.

Lee F. Backus, senior vice president of Buckingham Research Group, explained the people who have jobs "are feeling a lot better." Obviously, those out of work aren't. "The stock market had a big recovery. Wall Street is doing better. A lot of people I know are feeling better. Yet, people who lost their jobs are scraping by. Those making $200,000 are now making $20,000."

Harry Bernard, executive vice president and chief marketing officer at Colton Bernard, the San Francisco-based consulting firm, said, "When you have a jobless recovery, it's not the same as people going back to work. Until there's some kind of visible marked development in employment, we're still not in the best frame we should be."

That said, Bernard doesn't believe things are as bleak as they were. "There are upticks attributed to better technology. One person is doing the job of three people.

"There's higher productivity at less costs to the bottom line, which will look better for corporations." However, he warned that one has to consider what the war is costing, what homeland security is costing, and that the United States is footing the bill. As for the recovery, Bernard observed, "It's artificially created." He said newspapers, television, talking heads, government and even retailers are promoting an upbeat feeling. "The bottom line is, 'Is it for real?' It's only partially real. Will it have sustained growth? It's all going to really depend on what'll happen in Iraq. That has the most effect on people."

On a positive note, Diane Swonk, chief economist at Bank One Corp., Chicago, said retailers had strong growth in 2003. She said the consumer is now able to take on more debt than ever before. "They've never been more liquid through refinancing their mortgages .... We still have a lot of catch-up, but the consumer never slept. The consumer never collapsed, even during the recession. They were the Atlas that held everything up," she said.

Consumer Debt, excluding Mortgages

1998 - $586 billion

1999 - $621.9 billion

2000 - $693 billion

2001 - $727.3 billion

2002 - $738 billion

2003(2 qtr.) - $728.4 billion

Source: IRS, Salomon Smith Barney and Conference Board