August 26, 2003

Clear as Muddle

Consumer sentiment improves, but sales of new homes slow down. Durable goods orders are up, but stocks are falling. Is this more muddle? Or can we make something of it? This from "The Conference Board said its monthly gauge of consumer sentiment improved robustly in August as Americans pinned their hopes on brighter economic times ahead. Meanwhile, the Commerce Department reported that new-home sales dipped in July as rising mortgage rates turned off some house hunters. But even with the decline, sales posted their second best month on record. Earlier, the government announced that orders for durable goods -- big ticket items like refrigerators, designed to last three years or more -- climbed 1.0 percent in July after a rise of 2.6 percent the previous month. The report was broadly in line with economic analysts' expectations." Let's deal with the confidence numbers first. Consumer confidence is now 32% higher than it was in March. But what exactly does that mean? Does it mean consumers are 32% more likely to buy houses? Or 32% more likely to buy a new refrigerator, take a loan, start a business, or buy stocks? It doesn't mean anything, to be honest. The best expression of consumer confidence is consumer spending. A confident (often falsely) consumer is a spending consumer. So what to make of the durable goods report? Durable goods orders rose 1.0% in July. Strip out defense capital goods and the growth rises to 1.4%. This is still 53% lower than June's growth rate of 2.6% Orders for primary metals, computers, and machinery were all up nearly 2% in July. But upon closer look, investment in non-defense and non aircraft goods was up only .4% after being up 2.1% in June and 1% in May. What does this tell us? This is not the robust pickup in business investment we've been told about. And even in the areas where you ARE seeing growth in business spending (computers and electronics), it's not the kind of capital investment that creates jobs. It's true, investment in computers and electronics may lead to productivity gains. But that's just another way of saying investment in labor saving machines leads to higher unemployment. It would be all well and good if every job lost to a computer or a machine was replaced by one in a new industry. But that's not the case. The American economy is NOT doing a good job at replacing the jobs it loses to higher productivity with other jobs. The end result is a structural change in the labor market where those with the skills and the jobs do more work for, perhaps, a higher wage. But the rest are left unemployed or underemployed or working at Wal-Mart and McDonald's. And if you want to make the argument that we'll get through it because we're more "dynamic," that's fine. But faith in American dynamism does not create jobs are give America a competitive advantage at producing anything. Investment creates jobs. And you invest in industries which are profitable because you have some advantage over others. In today's American economy, it's not clear what future industry is going to emerge to give America a competitive advantage...AND absorb the large poll of available labor at the wage levels all those laid off manufacturing workers are used to. If you have an answer, let me know.


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