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Last Updated: Tuesday, 12 August, 2003, 07:33 GMT 08:33 UK
US economy confounds the sceptics

By Stephen Evans
BBC North America Business Correspondent

On October 25, 1929, the day after the catastrophic "Black Friday" Wall Street crash, President Herbert Hoover pronounced: "The fundamental business of the country - that is, the production and distribution of commodities - is on a very sound and prosperous basis".

President George W Bush
Will the economy aid his re-election?
Could a politician have got it more wrong?

Those confident words preceded a decade and a half when unemployment went through the roof, profits and pay went through the floor and the norms of economics and politics went out of the window.

Fortunes were lost and governments fell as America pulled the world into depression and Europe pulled the world into war - and all after the "fundamental business of the country" was pronounced to be "on a very sound and prosperous basis" by the President of the United States.

So assertions from on high of the fundamental soundness of the economy ought to be treated with caution.

As signs of impending demise, they're on a par with those votes of confidence in football managers.

A 'healthy' patient

Or are they? For a good two years now, President Bush and those around him, from Alan Greenspan down, have intoned the same mantra: the fundamentals remain strong.

Mr Bush's rising budget deficit is starting to worry economists who wonder how it will be financed five or ten years down the line
Their argument is that adjustments had to be made: a speculative bubble burst, slashing stock prices; manufacturers had to cut their costs for the new straitened times - but once the painful changes had been made, growth would resume.

There was a post-binge hangover which would heal with time, but the patient was fundamentally healthy.

Sceptics pointed to rising unemployment, to wobbles in indices of consumer confidence, to tales of woe from manufacturers and jitters in the bond market - but the word from the Fed and the White House was that the pessimists would be proved wrong.

Positive signs

Now with the summer pause for thought, Republican politicians and economists may doze more easily on the sun-loungers knowing that the latest slew of economic figures seems to bear out the optimistic scenario.

Car production line
Industry is showing signs of revival
There was a hefty rise in new orders for goods from American factories in June, with the biggest rise coming in durable goods like washing machines.

The whole economy grew at 2.4% in the second quarter of the year, a substantial acceleration.

Stocks of unsold goods have fallen, often a prelude to increased company spending.

Risks

Of course, there are still big clouds on a brightening sky.

The big D-words are still there: the deficits in the public finances and in the trade balance.

Mr Bush's rising budget deficit is starting to worry economists who wonder how it will be financed five or ten years down the line.

Republicans say that growth will bring tax revenue that will erode the deficit, but everybody else - notably bond traders - are sceptical.

And the balance of payments deficit will continue to hold back economic growth, even if American consumers remain characteristically confident.

Rising confidence

But there is no doubt that the short-term economic outlook - the outlook that takes the President to the election - is brightening.

The cliché about Bush Junior imitating his father and 'winning the war but losing the election' now seems redundant
Unemployment may well remain relatively high, particularly as productivity keeps rising so companies can expand without taking on new workers.

And anyway, unemployment lags behind other economic factors.

But in the White House, and a mile away at the Federal Reserve in Washington, there may now be some quiet satisfaction, a little confidence that the economy is starting to turn round.

All the signs are of accelerating growth as this year and next progress.

The cliché about Bush Junior imitating his father and "winning the war but losing the election" now seems redundant.

The economy now seems less likely to trip the younger Bush up.

The big question is: despite the conventional wisdom, will it be the war that does for him?



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