September 14, 2001
Rewriting the Script for the U.S. Economy
As the country tries to sort through the confusion of a disaster without precedent, economists and policymakers have their own worries when it comes to the near-term future for the U.S. economy. Given the fragile state of the economic growth, both in the U.S. and abroad, this new jolt to our collective confidence was certainly a step in the wrong direction. With the precedent of the 1991 recession following Iraq's invasion of Kuwait staring us in the face, the fear of a loss of consumer confidence producing another painful downturn is well justified.
As these words arrive to you, the more fundamental, and thus more frightening, challenge to our collective confidence will already have been met. Despite the shattered infrastructure of lower Manhattan, the business of trading, investing, and financing the economic activity of our country will continue without prolonged interruption, restoring a sense of normalcy that has been suspended in recent days.
More significant for the economy is our collective confidence in the sustainability of the economic expansion. As every banker knows, a belief that investments today will pay dividends in the future is the glue that holds our economy together. With new uncertainty over the global political climate, not to mention a reassessment of the logistics of trade, travel and commerce, our vision of the picture is decidedly murkier than before.
Finally, the timing of this disruptive attack is especially unfortunate for the economy. With business spending already down, and exports driven down by the strong dollar and slumping economies abroad, consumer spending has been the one steadying force that helped keep the fragile expansion alive. The stubborn confidence of consumers in their own economic security will be sorely tested in the coming weeks, even as more bad news about our economic performance rolls in.
More complete reports on industrial activity in August pour cold water on any notion that the worst is over for the manufacturing sector. The Purchasing Managers Index, compiled by the National Association of Purchasing Managers, registered the mildest decline in its overall activity for several months in August. That outcome was influenced by an uptick in new order activity and the continued decline of inventories, leading some to believe that a ramp up in production was imminent.
But the Manufacturing Index of the Federal Reserve's Index of Industrial Production says otherwise. After treading water in July, the output of the nation's factories slipped by a full percentage point last month. Declines were particularly harsh for several durable goods categories important to the Indiana economy, including motor vehicles andprimary metals. Production in the latter industries is now down 10 percent from their levels of a year ago.
The best spin we can put on these discouraging reports is that all of these declines have commenced from the extraordinarily high levels of activity that were in existence last summer. With the Federal Reserve cutting rates aggressively, and with the extra stimulus of the Federal tax refunds, the stage was set a few weeks ago for a rebound in the U.S. economy. The coming weeks will tell us how completely that script will have to be rewritten.
About the Author
Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.
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