Economic Holiday Cheer
The holiday season is upon us and good news abounds. The economy is showing clear signs of recovery. The manufacturing sector grew to its highest level since 1983. The Institute of Supply Management November survey hit the lofty level of 62.8 as new orders rocketed and backlogs and production increased in 18 out of 20 sectors. The survey reading improved from 57 in October. Any number above 50 indicates expansion. If the manufacturing sector were able to sustain this level it would equate to overall economic growth of 7.3%.
That's not likely to happen. Coming out of a downturn manufacturing often spikes as it catches up with demand. Nonetheless, these are fabulous numbers and indicate that the consensus economic forecast of 4-5% growth for next year is more than reasonable. After that who knows. Then again, the election will be over and who cares?
Needless to say, the report caught economists off guard. The numbers were so good it looks like the beleaguered manufacturing sector will start hiring again after three years of job losses. This will help sustain the improving employment picture that added about 250,000 new jobs over the last two months. With that said, don't expect unemployment to plummet next year. Companies will continue to be cautious in hiring and job creation needs to be in the 200,000 per month range to dent the unemployment number.
I hope you're seated because this will shock you. The president speaking at a fund-raiser in Michigan credited his tax cuts for turning the economy around. I wonder if he has that line tattooed on his palm so he doesn't forget. Not written on the president's cheat sheets is any mention of the ballooning deficits. More on that later.
Clearly the tax cuts contributed to economic growth. No one ever said otherwise. The question is whether they were necessary and whether they represent sound long-term economic policy. In truth, the cuts probably had only a marginal impact on growth. The economy was poised to rebound on its own.
Last fiscal year that ended in September, the tax cuts put an additional $117 billion in taxpayer's pockets. That's on top of a $10 trillion economy. Do the math. It's about 1%. But a big piece of that 1% hit in July and August in the form of rebate checks. And surprise surprise, the economy grew at the outrageous rate of 8.2% in that quarter.
According to the Congressional Budget Office, another $200 billion in tax cuts will hit the system this fiscal year, mostly through June of 2004. Again, refund checks will play a major role. The refunds will result from the retroactive nature of the reduction in the tax rates. The last cut was effective on January 2003 but the tax tables weren't changed until July. That means most taxpayers will get money back when they file next year.
The good news seems never ending. That might be true if there were a presidential election every year. There isn't and the good news comes to an abrupt halt as the benefits of the tax cuts begin to diminish from 2005 and beyond. That's when the bill comes due.
