Whither the Economy in 2004?
by Robert W. Bradford

The question on everyone's mind concerning the economy in 2004 is "Will it be any better than last year?". There are troubled areas in the US and global economies, to be sure, but for many of you the answer will clearly be "yes".

GDP growth has shown great reliability, giving us a respectable – if unexciting – 3.5% annual rate for the previous 12 months. Again, not the exciting numbers of the first quarter, but GDP is showing a much-needed tendency towards consistent, dependable growth. Consumption growth is outpacing income growth, which we tend to see when consumers become more optimistic about their prospects. Some of this is coming out of savings, which isn't a good thing long term but may be beneficial in the short run. Certainly, the stable inventory numbers are telling a story of a well-managed economy moving into a period of sustained growth. This story is supported by the continued big increases in orders for plant and equipment, which are very welcome. Hopefully, the plant and equipment numbers indicate that many industries are shaking off their capacity hangover from the roaring nineties – or at least beginning to do so.

One statistic we'd like to see better numbers on is civilian employment. While we aren't seeing a big decline, we also aren't seeing a big improvement here, and 2004 needs to be a year of gains in employment if we are going to get a solid expansion going. Unfortunately, employing Americans has become somewhat unfashionable – especially in manufacturing – and we need a good answer when asked "Why would you want to pay more to have an American worker make this product or perform this service?". Failure to arrive at a satisfactory answer can only mean that the job in question is likely to move overseas. This question should seriously be considered by employers as well as employees, and probably by politicians, too.

Housing is continuing to bring in impressive numbers, despite clear signs that interest rates have bottomed out. If you are in construction, you will definitely want to prepare for a leaner environment in coming years, as the Fed has signaled quite strongly that low, low rates are unlikely to continue in an overheating economy. In other words, for the folks in construction and related industries, really good economic news could be really bad.

Productivity has recovered from its recent dip. Hopefully, we will see this translate into improved profitability and better employment numbers in the next few quarters. At the very least, improved productivity combined with a weaker dollar will likely lead to a better US competitive position in global markets, which we sorely need.

Capacity utilization appears to be turning around again. This could be a real yo-yo, moving up and down in the coming year as many industries are still making much-needed adjustments. Some of the new realities of the global market are going to require serious strategic re-thinking, and possibly re-allocation of capital resources. The near-term result of this is that managers in many industries are going to be challenged by sudden swings in demand and pricing that could well be catastrophic for the unprepared.

Interest rates remain attractively low, although there are clear signs that they will likely head up with the economy if and when we see a broader recovery taking root.

The price indexes show continued stability – at least, if you ignore the giant jump in crude materials prices that we saw in the first quarter of 2003. The one percent decline we saw in the last quarter is interesting, but we probably shouldn't get too used to stable, low prices. The weakening dollar will ultimately help US exporters, but it will also increase the costs of most imported raw materials – especially energy.

Finally, the composite leading indicators warmed up even further this quarter. Not a huge leap up, but we don't really need that. A solid, sustained upward movement with no downticks will give us much better confidence that 2004 and 2005 will be solid years.

Remember, we are still concerned about 3 things holding the US economy back: 1. Low manufacturing capacity utilization; 2. Continued deterioration of the trade balance, especially in manufactured goods; and 3. A reluctance to create new jobs, especially in manufacturing, which is largely due to the first two items. While we didn't see any great blows to the economy in the third quarter numbers, we also didn't see any great improvements in those three key areas.

Some of the less than inspiring performance in the US economy may well be related to the Iraq War. As we predicted in the first issue of 2003, "war jitters" have had a dampening effect on the economy which is likely to be ending very soon. The weak economy has also shifted attention to serious cost-cutting in most manufacturing businesses as consumers drove retailers to search harder and harder for the best deals. A recovering economy will likely reverse this trend, but slowly. Already, the early retail returns for the 2003 Christmas season show us much stronger performance in the high-end retailers combined with somewhat disappointing performance at the low end. This was nowhere more apparent than at Wal-Mart, who missed their projected same-store sales growth targets for the first time in recent memory. If this is a sign that consumers are getting tired of commodity products, we can only applaud it. Certainly, there are signs that the commodity service trend – highlighted by the rush to move customer service phone-center jobs to Asia – is coming to an end. Key players in consumer electronics such as Dell are quietly – or not-so-quietly – moving their phone support operations back to the US because customer complaints about service were skyrocketing while the improved efficiency they found was not as great as hoped for. US manufacturers are hoping that their customers come to this realization and follow suit – but the successful ones are pursuing strategies that will ultimately highlight the hidden costs of overzealous commoditization.

We said in our last issue that this quarter would see the last of the noticeable depressing effect of the Iraq war, and current events are bearing that out. 2004 will be a year of seeking a new equilibrium for many industries, but the idea of a sort of "return to normalcy" can only be an illusion. Great changes are afoot in many sectors of our economy that require us to have great strategic acumen. As before, we recommend keeping a close eye on the longer term trends and serious consideration to fundamental changes in strategy warranted by the shifting global situation in your strategic planning.

Robert Bradford is President of Center for Simplified Strategic Planning, Inc. He can be reached via e-mail at

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