June 30 (Bloomberg) -- U.S. economic growth in the second half of 2003 may be twice as strong as in the first, fueled by the most potent combination of stimulus measures in 62 years. What the predicted acceleration won't do, according to economists, investors and executives, is spur enough hiring to cut unemployment or pull Europe and Japan out of their economic doldrums. The economies of Germany and Italy shrank during the first quarter of this year, and the euro's 16 percent gain against the dollar in the past 12 months is expected to hobble European exports. Japan's economy has stagnated for a decade.
``The U.S. economy is once again going to be the locomotive for global growth, but given the condition of Europe and Japan, I don't think we're going to end up pulling the rest of the world along very fast,'' said Cynthia Latta, principal U.S. economist at Global Insight Inc. in Lexington, Massachusetts.
In the U.S., a 19 percent drop in oil prices since mid-March, the lowest interest rates in 45 years and a $350 billion package of federal tax cuts together with aid to states ``are setting the stage for recovery,'' said Richard Berner, chief U.S. economist at Morgan Stanley in New York. The firm this month raised its growth forecast for 2003 to 2.4 percent from 2.2 percent and to 4.3 percent from 4 percent in 2004. A faster recovery may send stock prices and bond yields higher as investors become more confident in the expansion, said James W. Paulsen, chief investment officer of Minneapolis, Minnesota-based Wells Capital Management, which oversees $110 billion. The Dow Jones Industrial Average has risen 19 percent since its low for the year on March 11. Yields on 10-year Treasury notes have fallen to 3.56 percent from 4.18 percent in January.
Stocks, Bonds
The recent rise in stock prices has come in the face of skepticism among some investors that the gains ``might still be a bear-market trap,'' he said. That may make the rally more sustainable than those of early 2001 and after the Sept. 11 terrorist attacks, Paulsen argued in an interview last week. ``This means that if the economy does pick up, it will still be a surprise to most people, and they'll have to increase their equity exposure and decrease their bond holdings,'' Paulsen said. He projected that yields may rise as much as a percentage point on 10-year Treasury notes.
A more robust expansion also would probably help U.S. President George W. Bush win a second term in the November 2004 election, said David Wyss, chief economist at Standard & Poor's, the New York-based credit-rating firm.
Timing for Bush
``The timing is great for him,'' Wyss said in an interview. ``Basically, people vote on the basis of how the economy's been in the year before the election. And that's going to look pretty good.'' The Federal Reserve Board cut its overnight lending rate Wednesday by a quarter-point to 1 percent -- down from 6.5 percent before January 2001, when the U.S. central bank made the first of 13 rate cuts, and the lowest rate in 45 years. That potential boost to the economy comes on top of the $330 billion, 10-year tax cut that Bush signed into law May 28. The government is to begin sending checks to taxpayers entitled to child tax credits under the measure as early as July 25. ``The last time we've had this strong a stimulus was at the start of World War II,'' said David Kotok, chief investment officer for Cumberland Advisors Inc. of Vineland, New Jersey, which manages about $500 million.
Snow's Forecast
Treasury Secretary John Snow Thursday predicted a ``nice pickup'' in the economy with expansion reaching ``well over 3 percent'' in the second half. ``Monetary and fiscal policy are working together to lay the foundations for much better growth,'' he said in a television interview with Bloomberg News. The combination of improved economic and financial conditions and new government stimulus has prompted economists such as those at Goldman, Sachs & Co. to raise their growth forecasts for the next few quarters to almost 1 1/2 times what they had been a few months ago. A Bloomberg News survey of 55 economists in early June found a median expectation that growth would more than double from the first quarter's 1.4 percent to 3.3 percent in the third and 3.5 percent in the fourth, heading toward 4 percent or higher in 2004, the best since 1999. ``I think there is a modest, yet fragile recovery taking place,'' Kenneth Lewis, chief executive officer of Bank of America Corp., the third-biggest U.S. bank, based in Charlotte, said in an interview. ``I think the strength in refinancing and home equity lending will continue through the remainder of the year.''
Nucor Assessment
Dan DiMicco, chief executive of Nucor Corp., the largest U.S. maker of steel beams, said he sees ``some signs of improvement in the economy,'' and he called the Fed rate cut ``positive.'' So far, there have been few clear signs that the U.S. economy is accelerating. Retail sales were unchanged in April and May. New orders for durable goods rose 1.3 percent in March and fell 2.3 percent in April. Industrial production fell 0.6 percent in April and rose 0.1 percent in May. U.S. factories are still operating at just 74.3 percent of their capacity, the lowest in 20 years. The National Bureau of Economic Research, the private group of economists in Cambridge, Massachusetts, that determines when recessions start and stop, hasn't declared an end to the slowdown that began in March 2001. ``It's faith-based forecasting at its best,'' said Mark Zandi, chief economist at Economy.com, a West Chester, Pennsylvania, economic forecasting and consulting group. ``With a little job growth, long-term interest rates could rise significantly, weakening the markets for housing, autos and mortgage refinancing. So the economy won't come roaring back.''
`Like a Fighter'
S&P's Wyss says the 4 percent growth rate now being projected for late this year and early 2004 would still be well below the 6 percent he says the U.S. has averaged in the first year after each recession from 1954 through 1983. It also would be barely enough to start bringing down unemployment, which in May reached 6.1 percent, the highest since July 1994. ``The U.S. economy is like a fighter who's been punched from different angles'' for several rounds, Cumberland Advisors' Kotok said. ``If we get more shocks, we'll continue the malaise that has affected the economy in the past few quarters.'' He said such shocks may include terrorism or higher energy prices. The gap between the U.S. and its major trading partners may widen, economists say. For the 12 nations that share the euro, growth this year will be between 0.4 percent and 1 percent and next year, 1.1 percent to 2.1 percent, according to European Central Bank projections. Economists surveyed this month by the Blue Chip economic indicators predicted that Japan will expand 0.8 percent in 2003 and 1.1 percent in 2004.
U.S.-Led Recovery
Global Insight, the economic forecasting and consulting firm, predicts that the economies of the 12 countries that share the euro will grow at annual rates of 0.9 percent and 1.3 percent during the last two quarters of this year and 1.5 percent and 1.7 percent in the first and second quarters of 2004. The concern estimates the euro economies will grow an average 0.6 percent in 2003 and 1.6 percent in 2004. ``My main expectation is still a U.S.-led recovery of the world economy later this year, but a recession in Europe is something we may need to reckon with,'' said Juergen Wunner, who helps manage the equivalent of $114 million at Bank Julius Baer Holding AG in Frankfurt. The dollar's decline against the euro is hurting European exporters, whose shipments to the U.S. account for about 17 percent of economic output in the euro region. Italy's biggest employer group, Confindustria, on June 18 slashed its forecast for economic growth this year by almost half to 0.8 percent because the euro's rise and falling exports are hurting Europe's fourth- biggest economy.
BMW, VW
Bayerische Motoren Werke AG, the world's No. 2 maker of luxury cars, said the rise of the euro may hurt earnings next year. Volkswagen AG, Europe's largest carmaker, said first-quarter net income fell 68 percent, partly because of the dollar's decline. The Global Insight forecast for Japan calls for growth rates of 0.7 percent and 1.3 percent in the last two quarters of 2003 and 1.8 percent in each of the first two quarters of 2004. Japan's government says it expects the economy to grow by 0.6 percent in the year ending March 31, 2004. ``The only way to be optimistic about the Japanese economy is to look at the charts upside down,'' Kenneth Courtis, vice chairman in Asia of Goldman Sachs Group Inc., said at the Asia Oil and Gas Conference in Kuala Lumpur June 18.
Japan's Hurdles
Among the hurdles in Japan are deflation and more than 52.4 trillion yen ($440 billion) of non-performing bank loans. Consumer prices have fallen for five years, land prices for 11 years, and Japan's economy is smaller now than it was in 1996. This year, exports have slowed, threatening to reduce what little growth there is. ``There's no sign of strong growth or that Japan can spark a self-sustaining recovery,'' said Tatsuya Torikoshi, a senior economist at Daiwa Institute of Research in Tokyo. China's economy may resume growing following its bout with severe acute respiratory syndrome. The world's most populous nation doesn't buy enough from the rest of the world to make it a major growth engine outside Asia. Asian economies slowed in the first half of the year, as concern over the Iraq war and a weakening dollar hurt exports, while the spread of SARS slowed retail sales. Those impediments have since faded.
Now economic growth outside Japan will probably total 5.3 percent for 2003, about 0.4 percentage point lower than this year's pace, Tim Condon, ING Financial Markets' chief economist for Asia, said in a note to investors. Asian economies ``are poised to take advantage of a global recovery,'' Condon said.
Signs of Rebound
At Middleby Corp., in Elgin, Illinois, demand for the cooking equipment that the company makes for restaurants and cafeterias has picked up, says Selim Bassoul, chief executive. Middleby is the leading producer of such gear and employs 1,100. He isn't convinced the trend will last. ``I would like to see a solid 90 days of traction in orders,'' Bassoul said, before he risks investing and hiring. He has delayed buying new equipment and improving the company's training facilities. David Malpass, chief global economist for Bear Stearns & Co., says there are enough signs that the economy is stabilizing to make him more bullish. The dollar's decline and the low interest rates should help pull manufacturing out of its slump, bolster the real estate market, keep consumer spending high and spur an increase in business spending, he says. ``There's no doubt that the government stimulus, from the interest-rate cuts to the tax cuts, is going to increase disposable income over the next few months,'' said Edward Yardeni, chief investment strategist for Prudential Financial in New York, in an interview. //www.bloomberg.com