Business Survey Keynote with Mark Zandi, Ph.D. and Brian S. Wesbury

ISM's 89th Annual International Supply Management Conference

Philadelphia, PA
April 2004


Roberta J. Duffy

Mark Zandi
Chief Economist, Co-Founder

Brian S. Wesbury
First Vice President & Chief Economist
Griffin, Kubik, Stephens & Thompson, Inc.

After the release of ISM's 67th Semiannual Economic Forecast, two leading economists shared their views on the current state of the economy and their predictions for the coming months and years.

Mark Zandi is optimistic about the growing strength of the economy and thinks that it will pick up even further, due to three main reasons. First, there will be a fiscal stimulus in terms of money going into businesses and industry. This is because the tax cuts people are currently enjoying is keeping tax payments down, resulting in higher disposable income. Also, government spending is growing, similar to the patterns seen during the Vietnam and Korean wars. And there was $70 billion in 2003 borrowed from mortgages, again resulting in families and individuals having more funds at their disposal to put back into the economy. All these factors create a huge fiscal stimulus.

Second, there is a developing inventory cycle. The inventory-to-sales ratio in industry is going lower. While businesses will eventually have to rebuild these inventories to some extent, it currently means firms are enjoying those sales revenues without immediately filling inventory.

Third, productivity growth is high, 5 percent, which means that hiring is increasing. This is a particularly good sign because when some of the tax incentives go away in 2005, it will be key to have employment returning by then.

Unfortunately, with all these positive factors, there are some concerns, including withering global competition, potential housing market problems as some areas have been overbuilt, and a growing government budget deficit. However, overall Zandi's outlook is positive.

Brain Wesbury shared this same optimism, saying that he predicts first quarter 2004 growth will end up being 6 percent, and for the year, overall growth will be 5 percent, including a 20 to 25 percent gain in stock market. However, he also says that interest rates are too low and hopes that they will start to increase by at least August. Increasing interest rates will help subside inflation fears.

While all of these numbers are very positive, Wesbury also mentioned a general sense of unease that seems to permeate the general economy. How does one explain this? Perhaps it has to do with the fact that the percent of manufacturing jobs (as a percent of total employment) is down 11 percent. Hi-tech investments have risen, but often at the cost of manufacturing jobs, resulting in strong numbers, but a fearful attitude across the country.

Everyone has read headlines and heard the buzz about jobs being outsourced to other countries or being replaced as a result of technological advancements. In Wesbury's view, however, in the long run, these trends generally are favorable to the economy. Take this example: When telephones were first invented, telephone operators were essential to connect calls. Back then, if you were to project out the eventual broad use of the telephone, you would think that the number of telephone operators would exceed all other professions. However, due to technological advances in the telephone industry, at some point, personal operators weren't necessary. While the loss of operator jobs seems a negative in the short run, those same technological advances ultimately led to an even greater number of jobs related to telephone lines, wireless communication and telephone software technology.

The same argument applies to the current trend of offshoring jobs. The companies that have chosen this route are doing so to decrease costs and increase profits. By doing this, they are able to remain viable and grow their businesses, ultimately creating more jobs in whatever products, services, or fields they next pursue.

By Roberta J. Duffy, editor of Inside Supply Management®

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