Economy in sudden acceleration

In not much more than a week, perceptions of the US economy have shifted decidedly, from glimmers of recovery to visions of clear-cut growth.

Acceleration is the trend from the trading floor of the New York Stock Exchange to the factory floors of General Motors.

The stock market has rediscovered the word "up." Unemployment edged downward last month, defying most forecasts. And consumer confidence rose solidly yesterday in a new Christian Science Monitor/TIPP poll.

Debate among economists has shifted from when a recovery will begin to how strong it will be. A few even question whether the US really had a recession last year. (Only in the third quarter did the economy actually shrink.) And while some forecasters say heavy debts could restrain America's high-spirited consumers, others talk of full-fledged 5 percent growth.

"The underlying trend of the economy is extremely positive," says Brian Wesbury, chief economist of a Chicago brokerage firm. "It could be another 10-year expansion."

Mr. Wesbury had been saying recovery would be slow in the first half and strong in the second. Now he predicts a strong recovery for the entire year, possibly above 4 percent.

Particularly encouraging, Wesbury says, are numbers showing an upturn in the hard-hit manufacturing sector.

Consumers, too, sense better times ahead. The Monitor/TIPP poll, conducted over the weekend, shows a sharp jump in its index of economic optimism, which jumped to 62.9 from 60.4 in February and from a low of 52.1 in a poll completed Sept. 9.

"Economic confidence is sweeping the nation, across all regions, age groups, income levels, and party affiliations," says Raghavan Mayur, president of TIPP, a unit of TechnoMetrica Market Intelligence that conducted the poll. The poll, which surveyed 921 Americans, is the first broad indicator of consumer confidence released each month.

Economists have a similar cheerier view. Federal Reserve chairman Alan Greenspan, for example, sounded notably more upbeat in Senate testimony last Thursday than he had in the House a week earlier.

"We have seen encouraging signs in recent days that underlying trends [in demand for goods and services] are strengthening, although the dimensions of the pickup remain uncertain," Mr. Greenspan said.

Indeed, some say the economic engine could sputter as consumer spending maxes out. But for now, those gloomier economists can only apologize for missing the positive surprises.

"How could I be so stupid?" asks an embarrassed Stephen Roach, chief economist in New York of Morgan Stanley in a Monday commentary. He still sees himself as "the last living economist in America" to talk of economic relapse later this year.

A host of numbers lifted the outlook of the economists.

Retail chains had their best month in two years in February, with sales rising 6 percent from a year earlier. Worker productivity continued its astonishing upsurge, rising at a 5.2 percent rate in the fourth quarter of 2001.

Economists generally agree on why the upturn is occurring.

• The Fed cut interest rates 11 times last year, making many debts easier to finance and bolstering home construction.

• Washington has conducted a stimulative fiscal policy. Within a year, the federal budget has moved from a surplus of $255 billion to a small deficit (or tiny surplus). Extra spending on national security has helped boost economic output.

The passage by Congress of an economic-stimulus package last week is generally seen as late, but an added 13 weeks of unemployment insurance will help maintain the spending of the unemployed.

• Consumers kept up a buying spree. "We continue to do a great job of living beyond our means," says David Wyss, chief economist at Standard & Poor's. Consumers keep buying cars and furniture, despite record debt levels and layoffs.

Most economists figure on the economic pace stepping up as the year moves forward. But Susan Hickok, chief economist at Prudential Economics in Newark, N.J., expects the Fed to start raising interest rates as early as May to keep the recovery from heating up so much that inflation could restart. Ms. Hickock has been forecasting a 5 percent pace of recovery for months, far above the average view.

A key measure of the nation's money supply, known as M2, stands 10 percent above what it was a year ago. That is considered rapid growth. Money is the fuel for economic growth. Too much of it, though, can fuel inflation rather than real growth.

Hickok suspects the Fed will gradually raise the "federal funds rate," the rate at which banks loan money overnight to other banks, from 1.75 percent to 4 percent. That rate she describes as "normal" with inflation at 2 percent.

But for now, optimism reigns.

The economy is "picking up now," says Freddy Sanchez, a participant in the Monitor/TIPP poll who works for Hyde Moulding in Queens, New York. New orders for plaster mouldings have risen with the vigor of housing construction across the country. "I like Greenspan."