The key recent development in the U.S. economy is that it is strengthening, not weakening, with real growth likely to average 3.5% next year. While that is down from an estimated 5.2% this year, it is a good deal stronger than many are expecting in view of the recent stock market correction and the decline in real growth to a reported 2.7% last quarter. There is no question that the economy slowed down earlier this year. But as I read the figures, growth is now on the upswing, although it won't return to the levels that were reached in 1999 and the first quarter of 2000. Several factors support this relatively upbeat reading.
While overall real GDP rose only 2.7% last quarter, most of the slowdown stemmed from a big reversal in federal-government purchases, primarily termination of census workers, and no further growth in inventory investment. In fact, real private-sector final sales rose 4.0% last quarter, compared to 3.4% in the second quarter.
The consumer is back. From March through June, real consumer spending rose an average of only 0.2% per month; in July through September it rose an average of 0.5% per month. While consumer confidence declined in October, that also happened the last time the stock market crumbled in the fall of 1998. Then, the consumer confidence index plunged from 137.2 in July to 119.3 in October, but real consumer spending continued to advance at better than a 5% annual rate. Sure enough, consumer confidence turned right around as the stock market recovered, rising to 133.1 in February 1999 and climbing to a record high that June. Temporary dips in stock prices and consumer confidence do not destroy the forward momentum of consumer spending.
Spurred by lower mortgage rates, the housing sector continues to improve. New-home sales in September rose to 946,000, up from 866,000 in August and equal to the peak level reached in March. Meanwhile, construction put in place climbed 2.4% in September, much more than expected. Housing starts and building permits are still well below peak levels reached early this year, but both have recently bounced off their lows, and the decline in mortgage rates and a rise in new-home sales should boost housing starts further in the fourth quarter.
Total durable goods new orders have been flat for the last four months, but the key for determining where the economy is heading is new orders for nondefense capital goods excluding aircraft and parts. This has risen 2.5% in the last four months, or an annual-rate increase of 7.7%, and based on the American Production and Inventory Control Society survey, is likely to post another gain in October.
Payroll employment figures have been distorted by the hiring of 618,000 temporary census workers to collect information for the 2000 census; all but 6,000 of those workers have now been terminated. Excluding these workers, payroll employment rose an average of only 85,000 per month from May through August but gained 143,000 in September and October. The only signs of weakness in the so-called leading indicators are the October turndown in stock prices and consumer confidence but, as pointed out, short-term fluctuations in those variables do not influence economic activity. The outlook gleaned from other leading indicators is much more robust. While the Fed has not changed policy recently and probably will hold the funds rate steady throughout next year, long-term interest rates have declined substantially. Bond yields are down about 0.5 percentage point, while mortgage rates have declined almost a full percentage point. In the past, interest rates, housing starts, and new capital-goods orders always have been the three most reliable leading indicators, and they are pointing in the positive direction. Michael K. Evans is president of the Evans Group, an economics consulting firm in Boca Raton, Fla.