All the signs point to a recovery for the US economy, but can the consumer spending spree continue, asks Conor O'Clery, North America Editor.
New York Mayor Michael Bloomberg and New York Governor George Pataki climbed onto a platform on Broad Street outside the New York Stock exchange and performed an odd little ceremony on Wednesday. They officially declared "open" a chest-high wrought-iron railing along the kerbside, and unveiled a banner draped over the front of the building showing plans for a mid-road fountain stretching along the road outside.
The city dignitaries were marking a new phase in security measures around the financial heart of downtown Manhattan. The railings will replace metal barricades and concrete security barriers that have hemmed in pedestrians, the fountain will provide extra security against car bombs, and retractable bollards will replace the pick-up trucks that have been parked across seven intersections around the exchange for many months.
It has not been forgotten how devastating for Wall Street and the US economy was the attack on the World Trade Centre on September 11th, 2001. The stock market plummeted and companies across the US took a hit. Protecting the stock exchange, the engine of the world's largest economy, has become a major priority. But two years on, the area still looked like a war zone and the city has now set out to balance "security against liveability", as Carl Weisbrod, president of the Alliance for Downtown New York, put it.
This blending of the two reflects the synergy of post-9/11 America, where concerns about the inevitability of new terrorist attacks are balanced against the long-term recovery prospects of the economy. The recession officially ended in late 2001 but until this autumn the recovery has been weak and hesitant.
Amid the uncertainties of global terrorism and the war in Iraq, just about the only thing guaranteed to appreciate in value was the ring on one's finger. Gold, which Sir Thomas Moore memorably described as a useless thing but "everywhere much esteemed", glistens most brightly in perilous times, and its lustre usually fades when the true alchemy is found in rising share prices. The new balance, where the world is not at war but still not at peace, where a sense of foreboding hangs over business as usual, has seen gold soaring to new highs - $400 an ounce this week - while at the same time share prices continue rising.
Just as things are looking prettier on the street outside the NY Stock Exchange, they are definitely looking up inside, on the trading floor. The Dow Jones has risen 15 per cent since the start of the year. The tech-heavy Nasdaq has gone up 41 per cent in the same period. In the US economy there is a revival of "animal spirits" that indicates a new period of sustained growth, said the chief economist of the Paris-based Organisation for Economic Co-operation and Development (OECD), Jean-Philippe Cotise, on Wednesday, borrowing a phrase used by British economist John Maynard Keynes to portray confidence and risk-taking.
Anyone who doubts that the American economy is now at last revving up need only visit US shops, where the "animal spirits" are much in evidence. On Wednesday, the eve of Thanksgiving, when doing some early Christmas shopping in FAO Schwarz toy store on Fifth Avenue, I found myself in an unbearable crush of parents at the cash registers. There was another mob scene at the start of Macy's annual sale yesterday morning.
With consumer confidence rising an astonishing ten points in one month, from 81.7 in October to 91.7 in November, American retailers are forecasting a strong Christmas season, with the cash registers ringing as merrily as the sleigh bells. Going shopping is one way of measuring the vigour of the economy. Fed chairman Alan Greenspan, in addition to poring over statistics, likes to check the number of empty containers stacked up at America's main ports: the less there are lying idle the better the economy is doing. Another sign of better times, according to a friend who runs a bar, is whether he gets more 20-dollar bills than 10-dollar bills over the counter, and that's been happening. In a further telling anecdote, the Wall Street Journal reports this week that warehouse owners, not just in the US but around the world, have been recording phenomenal activity in the past two months, as toys, electronics, chemicals and other goods pass through at a fast clip.
All these signs are backed up by a shower of positive data. Company profits are up 30 per cent in the third quarter, business investment is up 18 per cent and, most astonishing of all, growth surged to 8.2 per cent in the July-September quarter - its highest level in 20 years. On Thursday the Federal Reserve gave its most optimistic assessment of the economy in three years. Retail sales are up, real estate is booming and manufacturing is red hot, said the Feds in their latest Beige Book survey (named after the colour of its cover) based on reports from 12 regional Federal banks. Rarely have analysts been so upbeat. David Wyss, chief economist at Standard & Poor's in New York, declared: "It's hard to find anything wrong with the economy. Everything's going right for a change." Mark Zandi, chief economist at Economy.com, said, "I think the economy is back. It has evolved from a very fragile recovery to a sustainable rebound." Brian Wesbury, chief economist of GKST Economics in Chicago, said, "The Bush boom is here to stay".
A key to the economic recovery has been the weak dollar. For anyone from the euro zone, America is now a much cheaper holiday destination, the dollar having fallen significantly against the euro in the last 18 months. A $600 hotel bill in New York that would have translated into €700 just over a year ago will today appear as just over €500 on your credit card.
The weak dollar poses problems for countries like Ireland by making exports to America more expensive. The Minister for Finance Charlie McCreevy said earlier this month that he saw signs of an American economy recovery and that with the economic recovery train on the way he was determined "when it passes our station we will not be left on the platform". But Jean-Philippe Cotise warned that the rebound in Europe in particular could be stifled by a sudden further weakening of the dollar. This could happen if foreign investors lose confidence in the US economy because of the huge deficit run up by the Bush administration to pay for tax cuts and the wars in Iraq and Afghanistan.
In America a weaker dollar improves the competitiveness of US exporters and in an election year the Bush administration is unlikely to resume a serious strong dollar policy. But if Washington signals that it would welcome a rise in inflation this could in turn push the dollar's value down further.
The recovery has been helped by the lowest interest rates in the US since John F. Kennedy was president. The betting in New York is that the Feds will not want to jeopardise a precarious recovery by increasing interest rates before next spring. Inflation is still low and unlikely to be much affected by rising commodity prices as the main business cost - labour - has been falling through higher productivity.
After the official end of the recession in November 2001, unemployment continued to rise for 19 months and today stands at six per cent. Here too the omens are good. Initial claims for unemployment benefits fell to their lowest level last week since Bush took office.
The economic upturn is very good news indeed for the Bush re-election campaign. For the first time this year the polls are showing that a majority of Americans approve of the president's handling of the economy. Some 76 per cent of Republicans and 30 per cent of Democrats say he is doing a good job on the economy. Bush is claiming credit for the rebound, frequently reminding his audiences that "we inherited a recession" (though the recession did not actually start until three months after he took office) and telling financial supporters in Las Vegas recently, "The economy of ours is reacting to our policy; business investment is rising; the job base is expanding; the tax relief we passed is working". As a rule the economy dictates whether a president gets re-elected. The Democrats are caught in a bind, having predicated their campaigns heavily on Bush's mishandling of the economy. Every item of good news is a setback.
But it's not all over by any means. The pace of economic growth is unlikely to be sustained. The effects of the summer tax refunds are lessening. Spending on high-priced items such as cars is down. Bush inherited a surplus of over $5 trillion (five million million) and is now heading for a record deficit. There have been up to three million job losses since he came to office and it is unlikely that more than half of these jobs will be replaced by election day next November. At a unique moment when every world economy, from the US and Europe to Japan, China and Russia, is growing, there are ugly trade disputes looming. On top of tensions between the US and Europe and Japan over Bush administration protectionism of US steel, a trade war is looming with China over a US decision to impose quotas on some Chinese textiles.
The Democrats will make the point that the recovery is skewed towards the rich. Democratic front-runner Howard Dean charges Bush with practising "Enron economics" by rewarding wealthy individuals and big corporations rather than average Americans with his "reckless and irresponsible" tax cuts. Dean strikes a chord with many voters by arguing that the principal motivation of the Republicans "is to undo the pillars of the New Deal, particularly Medicare and Social Security, by making the budget deficit so big that those programmes can't be sustained." There are other clouds on the horizon. The American economy continues to be bedevilled by scandals such as that at Enron, the world's biggest energy company, which collapsed after lying to the markets about its huge losses.
Recent disclosures of widespread trading abuses in US mutual funds, described by Republican Senator Peter Fitzgerald at a Congressional hearing as "serious, wholesale criminal violations", have shaken the faith of 95 million Americans who regarded the funds as safe and conservative havens for investment.
Corporate greed is still rampant. Notably absent at the Wall Street ceremony on Wednesday was Dick Grasso, who as chairman of the NY Stock Exchange was paid $5 million for reopening it after 9/11. He was forced out recently on the disclosure that he was set to be paid $186 million for running a regulatory agency at a time of scandals. One rainy day last week, 47 currency dealers, many from reputable banks, were arrested in the Wall Street district and led off in handcuffs to face fraud charges.
No matter how pretty the Wall Street security barriers are made to look, everyone knows that there is still something rotten at the heart of America's financial industry.