US: Two end-of-year events, on the surface unrelated, give a clue to some important pointers for the US economy in 2004. The first was the Dow Industrial Average climbing above 10,000 for the first time in 18 months, underlining the growing conviction that the US economy has broken free and is bounding ahead. Conor O'Clery reports.
The second was an announcement by IBM that it is relocating nearly 5,000 highly paid programming jobs to India, where they will not be so highly paid. The catalyst for the Dow breaking through the psychologically-important 10,000 mark was the publication of a Federal Reserve report indicating that the US Central Bank would leave the short-term interest rate at its Kennedy-era low of 1 per cent for longer than investors expected.
The reason was the Fed's belief that even if there is vigorous growth in 2004, there will still be significant unemployment that will keep inflation in check. Hence the significance of decisions like that of IBM, which underlines how pressure to cut costs is sending jobs overseas even as the technology sector recovers. One in five US technology jobs are already off-shore and this could become one in four by the end of 2007.
More and more high end jobs are being outsourced to countries like India and more recently China (The Palm pilot I bought in 2001 was assembled in Malaysia and the new model I got before Christmas was made in China).
It's not just call centres being outsourced any more. Distance has become less relevant. Morgan Stanley has analysts covering US companies from as far away as Mumbai. There has been a net loss of one million American jobs since the economy started growing again in late 2001, in a period when the US should have expected 3 million new jobs.
The phenomenon of American jobs leaking abroad was addressed by Alan Greenspan in a significant speech on December 13th in which he noted how the falling US dollar is making it even better value to have goods assembled in China where the currency is linked to the greenback. So while the US economy will grow next year, jobs will be slow to come back, according to the Conference Board, a New York research organisation that predicts economic trends.
The US economy will generate more than one million new jobs next year, but the unemployment rate will edge down only slightly, averaging 5.6 per cent in 2004, the Conference Board believes. This could have a big political impact as President George Bush is preparing to base his re-election platform on a booming economy that creates jobs.
This after all was partly how he sold the tax cuts, which mainly benefited the wealthy. The good news, said Conference Board chief economist Ms Gail Fosler, is that 2004 will be America's best year economically in the last 20 years and real GDP growth will hit 5.7 per cent next year.
"Growing business spending and continued strength in consumer spending are generating growth throughout the US economy," she said. This burgeoning strength is reflected in the Consumer Confidence Index which indicates that real consumer spending will fuel growth. The one major uncertainty for the world's biggest economy in 2004 is the dollar. Predictions about its course vary wildly.
Ms Fosler states confidently that "for all the concern about a weak dollar, the dollar will be worth more than the euro by the end of the year". Analysts at some big financial houses foresee the dollar weakening to more than €1.30 in 2004 as the US feeds its deficit.
All are agreed, however, on strong growth in 2004. In December the Economist's panel of forecasters' raised the 2004 growth rate in the United States to 4.2 per cent, up from 3.9 per cent in November. A leading forecaster, Mr Rod Smyth, chief investment strategist of Wachovia Securities, said he expected a solid year of 3-4 per cent real GDP growth for 2004 with bond yields rising and inflation unlikely to move lower.
Much more bullish is Mr Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson in Chicago, who forecasts 5 per cent growth and the creation of 3 million jobs (neatly restoring the Bush-era losses) on the basis that the US economy is being fuelled by "what appears to be the most stimulative set of economic policies in US history".
Monetary policy is more accommodative than it has been since the mid-1970s, the Bush tax cuts are the most "pro-growth" since the Reagan era and technology-driven increases in productivity all will combine to bring about this bonanza, says Wesbury, one of America's most influential analysts.
The dangers he sees are soaring government spending, increased business regulation and new momentum for protectionism with an increase in inflation. The predictions for 2004 are not all upbeat. Industry by industry, the Associated Press asked executives to give their forecasts for 2004.
Mr Mackey McDonald, head of VF Corporation, the biggest US jeans-maker, said that despite a rebounding economy, "don't expect consumers to go on big shopping sprees in 2004".
Mr Craig Barrett, chief executive of Intel, said that after the worst downturn in its history, the semiconductor industry has begun to revive and is expected to continue growth in 2004 as consumers and businesses buy new equipment to take advantage of the latest American innovations. Made overseas of course.
