Soft patch or mired in muck?

The economy is chugging along in what Federal Reserve Chairman Alan Greenspan calls a "soft patch." The wheels are spinning but slowly. The conventional wisdom is that the soft patch is a temporary phenomenon and that better times lie ahead.

The nation is "in the early stages of a multiyear expansion characterized by solid US and global growth, higher interest rates, and mild but persistent inflation," maintains David Malpass, an economist at Bear Stearns & Co.

But others worry that the economic news continues to be mixed. For example:

• Retail sales fell in August 0.3 percent from July.

• The current-account deficit, the broadest measure of the nation's trade and financial interactions with the rest of the world, rose to a record $166.18 billion in the second quarter. Such a deficit is a drag on the US economy.

• Industrial production rose 0.1 percent in August from July. At least that was a gain, though most economists were expecting a better number.

Such numbers are open to interpretation. The National Association of Manufacturers trumpeted that the manufacturing component of the industrial production number surged "a healthy 0.5 percent."

"Manufacturing production is now at a record high, surpassing the previous peak of June 2000," notes NAM economist David Huether.

Yet many economists are troubled. While most don't forecast a dip back into a slump, some see a weak expansion ahead. They point to several looming perils.

One is that huge current-account deficit. It means that the United States is spending about $1.8 billion more per day abroad, primarily to buy foreign goods and services, than foreigners are spending in the US. This deficit amounts to 5.7 percent of gross domestic product, the nation's total output of goods and services.

The deficit "poses great risks for the US economy," says Robert Scott, an economist with the Economic Policy Institute (EPI), a Washington think tank.

Here's how: Such an international deficit must be financed by foreigners buying US Treasury securities. Lately, that has been done mostly by governments, primarily in China, Japan, and Taiwan. More and more private foreign investors have been moving to the sidelines to avoid dollar assets. Mr. Scott calls it "a quiet run on the dollar."

If the "run" worsens, the US would have to hike interest rates to attract more foreign buyers, even though such a move would slow growth domestically.

EPI economists say the next president should tackle this issue by calling a meeting of key governments. The goal would be to make an agreement similar to the Plaza Accord of 1985, a deal that helped lower the value of the dollar in relation to other currencies and thereby reduced the large US trade deficit of that time.

Mr. Greenspan sounds less concerned. In an article in the latest issue of the Cato Journal, Mr. Greenspan writes that "spreading globalization has fostered a degree of international flexibility that has raised the probability of a benign resolution to the US current account imbalance." Nonetheless, he sees one caveat: that the trade deficit could erode this flexibility and lead to "creeping protectionism."

Another peril to the economy is high energy prices, in part a result of the insurgency in Iraq.

OPEC set higher quotas for production last Wednesday. Oil prices have fallen back from more than $50 a barrel to about $43. They were $16.57 in November 2001. But oil prices are less important to the US economy than in the past, economists argue.

A related challenge: the "terrorist tax" - the cost of the Iraq conflict, homeland security, and increased business uncertainty.

Then there's the relatively slow growth in jobs, much discussed in the presidential election campaign, and the slim rise in wages. Last week, the Bureau of Labor Statistics reported that average weekly earnings in August were up 2.9 percent from 12 months earlier, but only 0.4 percent after taking account of inflation.

In nominal dollars, that translates to an extra $17.93 a week in the average worker's paycheck.

Total employee compensation has risen more than that, because of the sharp increase in corporate health-insurance costs. But workers don't get that part of their compensation to spend as they wish.

"It will be hard to keep the recovery going if we don't get more employment growth - and an increase in real wages," says Charles Schultze, chairman of the Council of Economic Advisers under President Carter.

If consumer spending doesn't pick up - it accounts for two-thirds of all spending - economists wonder what will keep the recovery afloat.

The economic stimulus from the Bush tax cut is "done," says Irwin Kellner, an economist at Hofstra University in Hempstead, N.Y. The rise in mortgage interest costs has closed the door on refinancing for many homeowners. And the Fed could well raise interest rates slightly again when its policymakers meet Tuesday.

Dr. Schultze figures one reason for the slow growth in jobs is a surprising surge in productivity. But he wishes business would cut profits to pay better.