For the first time in more than three years the proverbial light at the end of the tunnel may not be an oncoming train, but actually a true brightening of the economic horizon. And skeptical manufacturers who fail to respond in a timely manner may lose market share, perhaps permanently. So suggests DuPont Co. senior associate economist Robert C. Fry Jr., who in 2002, together with colleague Bob Shrouds, was honored by the Wall Street Journal as the most accurate economic forecaster in America.
Fry delivered the Nov. 4 keynote speech at the annual conference of the Society of the Plastics Industry Inc.'s Western Region in Coronado. In that presentation, and in subsequent comments published Nov. 17 in one of his monthly update reports, Fry explained why he thinks the U.S. economy has finally turned the corner.
``Where we are right now, believe it or not, is two years into an economic recovery - which goes to prove that time flies even when you're not having fun,'' the Parkersburg, W.Va.-based economist told the SPI gathering
He acknowledged that continuing job losses and sluggish growth in U.S. gross domestic product has meant the past eight quarters certainly have not felt much like a recovery, even though real gross domestic product climbed slowly but steadily during that period.
But a huge 7.2 percent leap in the third-quarter GDP growth rate, the largest quarterly increase since 1984, together with gains by several other key leading economic indicators, signals true progress is being made, according to Fry. He told attendees that manufacturing production hit bottom this past April, and has been gaining traction since.
Even so, the fourth quarter will not be as strong as the third quarter, and the country is looking at a fairly ``blah'' growth rate of about 2.9 percent for the year as a whole. But Fry predicts GDP growth of 4.3 percent in 2004. He also projects about a 4.4 percent year-on-year rise in U.S. industrial production of rubber and plastic products, up sharply from the forecast dip of 0.6 percent in calendar-year 2003 and vastly better than the 5.9 percent fall suffered in 2001.
``Skepticism may be understandable,'' he wrote in his recent report, ``but there are good reasons to believe that this time the recovery is for real - that the stimulus from fiscal and monetary policy is finally overcoming the now-diminishing headwinds from terrorism, scandal and war.''
Fry notes that capital spending, long the missing leg of the recovery, finally is increasing. This comes at a time when overall U.S. manufacturing capacity utilization, currently shy of 73 percent, is hovering just above 20-year lows. So, while few people are building new manufacturing plants right now, spending for equipment is picking up - spurred in part by the 2003 tax cut that includes provisions for accelerating capital-equipment depreciation, he said.
Meanwhile, consumer spending, which never faltered during the 2001 recession, ``is zooming right along for the recovery.'' And even if it were to slow substantially, other factors should keep the economic engine firing. The inventory-to-sales ratio for the U.S. economy is at a record low, which Fry said means that ``inventory rebuilding is likely to add significantly to GDP growth and industrial production over coming quarters.'' Additionally, recovery in the rest of the world is likely to boost U.S. exports, he predicts.
Industrial production in U.S. manufacturing (excluding the high-technology sectors of computers, semiconductors and telecommunications equipment), turned up in June and then surged in September to its best clip since early 2000, before slipping slightly in October (though Fry is not sure the October number won't be revised upward later). And the Institute of Supply Management's new-orders index - which leads industrial production and other components of ISM's purchasing managers' index - has shown growth for six straight months and in October hit its highest level in nine years.
Still, the DuPont official points out that even though things are picking up now, U.S. industrial production still lags where it was a year ago. And at the current modest growth rate, he said, ``it will take till the beginning of 2006 to get back to pre-recession peaks,'' though he's hopeful it won't take that long.
Fry noted that if Federal Reserve Chairman Alan Greenspan's primary goal was to achieve price stability, then he has largely succeeded.
``When you do your project economics, don't assume prices are going to rise over time,'' he warned, since Greenspan is doing all he can to prevent that. Goods prices, excluding energy, actually are down significantly over where they were a year ago, and that's been true for the past two or three years. Services prices, on the other hand, are rising rather strongly, mostly due to soaring health care and education/tuition costs. Signs indicate that core inflation will stabilize, Fry forecast, adding that the Federal Reserve Board probably will hold the line on interest rates through mid-2004, and then raise rates in next year's second half as the recovery gains steam.
He suggested that two factors are continuing to tap the brakes on corporations' capital spending and hiring activity. One, of course, is concern over the shift of production to China, but the other - particularly by publicly owned companies - is what he termed the failure to adjust to a ``single-digit world.'' The vast majority is looking for double-digit earnings growth, and, with rare exceptions, that is just not going to happen over the long term. U.S. companies should adjust their targets downward and be very happy with high-single-digit earnings growth.
``If we set that hurdle too high, nothing gets over it,'' he said, and instead, companies in other parts of the globe that have more realistic targets will be the ones to invest and prosper.
Fry insists the U.S. economy is brightening. But he said there still is too much pessimism afoot, and he prodded attendees in Coronado to allow themselves to feel a little ``irrational exuberance'' for a change. In his Nov. 17 report, he wrote: ``Failure to recognize the recovery ultimately could prove harmful. If the economy rebounds more strongly than expected, companies with lean inventories and little excess capacity are likely to lose market share, perhaps permanently.''
He said he certainly understands those who question the current optimism of economists. ``But this time,'' Fry predicted, ``it looks like the recovery is for real.''