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U.S. media are fixated on the idea that the country’s economy is in grave danger, even though a quick look at economic fundamentals belies the air of impending doom, says Stratfor, the global intelligence company.
The key to this dichotomy is the uncertainty generated by the war on terrorism. The United States needs an obvious victory – either political or military – before the steady growth that is already occurring actually registers as real.
The Standard & Poor’s 500 index hit its lowest point in nearly five years this week, extending stock losses that have racked U.S. exchanges for weeks. Although pundits have been quick to blame losses on the ongoing wave of corporate accounting scandals, there is more to the problem than meets the eye.
The United States defines itself in terms of victories, strength, openness and personal security. The attacks of Sept. 11 struck at the core of this national psyche in a very significant way. It is indeed impressive that Americans’ economic behavior has proven as resilient as it has. However, lingering insecurities – which seem to be manifesting themselves at least partially in the weakened stock markets – appear to be latching on to every bit of bad news available and amplifying it out of proportion.
Strong consumer spending and GDP growth notwithstanding, the sense of malaise the Sept. 11 attacks engendered has not yet fully dissipated. Simply put, that feeling likely will remain until Osama bin Laden’s corpse is part of a Smithsonian exhibit.
This malaise mirrors the emotional fallout from the overall U.S. effort against al-Qaida. The Bush administration needs to keep the public on its toes to sustain domestic support for the war, but continual warnings of possible terrorist attacks are wearing on public confidence and optimism. Likewise, ongoing threats of military action against Iraq do nothing to dispel the feeling that something momentous and horrible is about to occur – and the markets continue to react accordingly.
Yet the economy is on very sound footing. Inflation isn’t merely tame; it’s flat. Worker productivity soared even in the dark days after Sept. 11. Strong spending patterns and rock-bottom inventories make the possibility of a Japanese-style deflationary trap a few steps past laughable. Consumer spending continues to plow ahead. Interest rates at 40-year lows have led to a massive boom in car sales – with a huge boost from zero-percent financing deals – a housing market that regularly sets fresh record highs and a burst of refinancing that could stabilize the U.S. banking sector for a generation.
In fact, the United States technically never suffered a recession last year. GDP growth in the quarter after Sept. 11 weighed in at 1.7 percent, a figure that often has topped European growth rates over the course of the past decade and regularly shames Japan. Then, in the first quarter of 2002, growth hit 6.1 percent. Although not sustainable, this hypergrowth should have proven enough to dispel fears of impending doom, and most analysts continue to peg second-quarter growth at targets of around 3 percent to 3.5 percent. The Commerce Department will release preliminary figures at the end of the month.
The problem is one of perception. Twelve years of rapid economic expansion created a sense among Americans that the country was both capable of and deserving of sustained, rapid growth. Average GDP growth from 1997 to 2001 was a dizzying 4.2 percent, and many have yet to absorb the fact that such rates may not be a permanent feature of the U.S. economy. Therefore, by the end of May, U.S. stock markets began slipping again.
Compounding the prevailing mood are the homegrown accounting and trading scandals that have punctuated the airwaves since Enron’s spectacular collapse last year. Every week, a new household name seems on the verge of being consigned to the corporate dustbin: Andersen, Dynegy, WorldCom, Merck, Tyco, Qwest Communications. Cultural icons such as Martha Stewart are under investigation, and now there is a threat of legal action against U.S. Vice President Dick Cheney for practices during his time as CEO and chairman of Halliburton. Even the past business dealings of President George W. Bush have been put under a harsh spotlight.
The accounting scandals are a needed shakeout, but the timing is unfortunate. The public perceives that something is flawed – perhaps fatally so – when, in reality, the corporate failures are a clear sign that investors will not tolerate bad behavior. The flurry of activity in both the courts and markets is proof of the U.S. economy’s self-regulatory and regenerative abilities, but, against the backdrop of war, many feel it is a sickness that could become terminal. At this point, it doesn’t seem to matter that U.S. accounting standards, flaws and all, are still the most transparent in the world.
Despite abundant data showing that Americans continue to spend freely, corporate profits are improving and exports are booming, the public mood is bordering on dejection. It is this misperception, mingled with the disquiet of the war on al-Qaida and the not-yet-war on Iraq, that truly threatens economic stability and growth. The results of this mood are the weak dollar, the drop in both domestic and foreign investment and the shift from “risky” stocks into “safe” treasuries.
The mood is contagious. Aside from some minor fluctuations, the United States remains the engine of the global economy – and consumer spending powers that engine. Tokyo rightly fears that any slowdown in the U.S. markets or a protracted dip in the dollar’s value will hurt Japan’s superficial recovery. While Europe is enjoying the euro’s recent resurgence, few harbor illusions that European stock exchanges operate in a vacuum. The London, Paris and Frankfurt bourses all have paced this week’s declines in the Dow, Nasdaq and S&P indices.
The key event in the next several weeks will be second-quarter corporate earnings reports, which should begin trickling in next week. Many investors expect to wait on the sidelines for these numbers before getting back into the game in any serious way. So long as these reports meet analyst expectations – which may in fact have become more realistic, due to the up-and-down nature of second-quarter economic figures – the markets could receive the psychological boost they sorely need.