2004 Outlook Improvement Ahead

November 7, 2003
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GRAND RAPIDS — Economic growth in 2004 is expected to exceed that of any year since 1999.

The economic outlook for 2004 is improving, primarily because business is ready to pick up the ball from consumers and run with it.

Consumer spending has carried the economy for the past two years, and consumers are likely to continue spending, but they will no longer be the lead players supporting economic expansion in coming months.

Business investment will come to the fore as the leading economic sector, Richard DeKaser, chief economist at National City Corp., told a group of business people gathered at the Peninsular Club Thursday morning for National City’s 2004 economic outlook presentation.

Capital goods spending tends to have pronounced cyclical swings during recessions because businesses try to preserve profitability by stalling investments in information technology, software, industrial machinery and equipment of all sorts, DeKaser explained.

Capital goods spending has shown improvement over the past six months.

The more of its capacity a business uses, the more capital investments it makes, so capacity utilization and capital goods spending are closely tied, he said. Both are up.

“Barring any adverse surprises, we’ll see rising levels of utilization going into 2004.”

A “very impressive” rebound in corporate profits is spurring capital spending, as well. Furthermore, surveys of company executives show that business confidence is “at extremely high levels of optimism,” DeKaser said.

Inventories have been lean and mean for more than two years and are leaner than ever before due to more adeptness at managing inventory, especially using barcodes and information technology systems.

Lean inventories are good news for manufacturing, and especially good for Michigan.

The state of Michigan is highly manufacturing oriented, so it takes a downward shock anytime the economy goes into recession. And the manufacturing industry has been the most damaged of any industry in the country over the past several years, he added.

“Every time you see lean inventories, you see manufacturing activity pick up,” he said. It’s manufacturing that’s needed to replenish those depleted inventories, so the manufacturing sector should see some growth.

According to DeKaser, the changing character of U.S. economic growth, particularly the weaker dollar and the shift in spending on capital goods, will be especially beneficial to Michigan.

He said that while the state’s economic growth rate is not expected to be on par with the national rate of growth, it will see greater improvement than most states.

During the last quarter of 2002 and the first quarter of this year, real GDP growth was a weak 1.4 percent.

In the second quarter GDP growth immediately accelerated to 3.3 percent and it’s now at 7.2 percent, amounting to year-over-year growth of about 3 percent.

DeKaser expects it will climb to 4 percent in 2004.

Consumer spending has been buoyed over the past couple years by steadily declining interest rates that now stand at critical threshold levels, he said.

“As recently as this past May we saw this level of long-term interest rates that made, literally, every mortgage written up until that time refinanceable. In fact, we saw precisely that happen.”

The year 1998 held the record for the largest ever mortgage refinance boom in U.S. history, but that has been surpassed by several orders of magnitude over the past couple of years, DeKaser pointed out.

On each occasion that people refinanced, they did one of two things: they either tapped out equity or just lowered their monthly payment. He said average equity extraction was around $30,000.

The country has experienced three consecutive years of record home sales as a result.

That always affects the economy very favorably, DeKaser noted, because Realtors do well, builders do well, and consumers go out to stores and purchase, on average, $3,000 to $6,000 worth of merchandise for their new home within six months.

The housing boom, however, is coming to an end, DeKaser said, because interest rates have begun to move up over the past two months, and low interest rates are poised to become a thing of the past.

Home sales and building activity will trail off as 2004 unfolds, he predicted, but a recovery in commercial real estate will help cushion the blow to builders and realtors.

Disposable income growth, which drives consumer spending more than anything else, was buoyed by tax cuts in 2001 and 2003. Tax cutting activity is probably over as well, he said, with the political pressures of a large federal budget deficit.

What it’s going to take to keep the economy going now is job gains.

DeKaser expects the labor market will improve because temp hiring has increased, which is an economic indicator that the economy is improving. Historically, temp hiring is followed by job gains in the rest of the economy.

From May through September there was “explosive hiring” of temps, he noted, and that bodes well for job gains in the private sector.

The state of Michigan should show substantial improvement in employment in 2004, DeKaser predicted.

He anticipates inflation will rise, fueled by a diminishing slack in the labor market, higher prices on commodities, with the exception of petroleum and rising import prices. 

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