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The Honolulu Advertiser

Posted on: Sunday, December 21, 2003

Economy bright at year's end

By William Sluis
Chicago Tribune

Thanks to a witch's brew of tax cuts, revved-up government spending on both military gear and civilian benefits, and the lowest interest rates in 45 years, the economy is shining as 2004 approaches.

The most recent measure of gross domestic product for the third quarter found activity bubbling along at an 8.2 percent annual growth rate.

Economists analyzing the numbers said that with an election year on the horizon, there are few signs of a slowdown in sight.

Yet joblessness remains a worry for millions of workers, and analysts are beginning to fret that the holiday selling season will prove less than stellar. Could the economy once again lose steam?

A few answers may appear Tuesday, with the final revision of the most recent GDP number.

Economist Sung Won Sohn says it is likely to hold steady at 8.2 percent. In the fourth quarter, he said, it appears the economy is advancing at a 5.1 percent rate, also very solid.

"The key is that businesses have joined in with consumers. They are buying new equipment, helping to propel the economy forward and higher," said Sohn, of Wells Fargo & Co. in Minneapolis.

In addition to renewing purchases of capital equipment, he said, companies are starting to rebuild inventories, which were at bare-bones levels.

Sohn said the holiday spending season will culminate with a rush of consumers into the stores.

"Americans have become trained to wait for bargains, forcing retailers to lower prices," he said. "There will be a flurry of last-minute purchases."

The question for the manufacturing sector is when activity will generate enough heat to produce some fresh hiring. Factories have done practically nothing to boost payrolls in three years, amid thousands of layoffs.

The report on November orders for durable goods, due out Wednesday, may indicate that the jobs drought is coming to an end, said economist John Silvia. While the orders figures tend to be volatile, he sees the results for last month rising by a robust 0.7 percent.

"Jobs in manufacturing are starting to come back," said Silvia, of Wachovia Securities in Charlotte, N.C. "Unfortunately, the gains in hiring are going to prove to be less impressive than what we are accustomed to, historically."

The holiday-shortened week includes reports on November personal income and spending Tuesday, and the month's new-home sales Wednesday.

Economists are looking for incomes to show a gain of 0.4 percent and spending to show a gain of 0.5 percent or 0.6 percent.

Sales of new houses are proceeding at record levels, with expectations that volumes for last month will rise slightly, to an annual rate of 1.11 million units.

Investors who placed their money in the stock market this year are holding onto gains of 25 percent to 40 percent.

Most analysts believe 2004 can produce a rise in prices of perhaps half those levels.

But Bannockburn, Ill., mutual fund manager Henry Van der Eb sees trouble on the horizon, because the Federal Reserve won't be able to hold interest rates at current levels.

"The central bank has created a 1 percent benchmark for short-term rates, but a market-driven rate should be more like 3› percent," he said.

Van der Eb, of the Gabelli Mathers Fund, said the Fed's easy-money policy is distorting priorities, penalizing savers and forcing money onto Wall Street and into such assets as gold and real estate.

As a result, he said, investors are misallocating capital, accepting a higher level of risk, for now.

"When the Fed raises interest rates, it will inevitably cause these investments to reverse in price," Van der Eb said. "We will see the collapse of yet another bubble, or more than one."