Will "soft patch" derail GDP growth?

Tom Stundza -- Purchasing, 10/7/2004

Some of the most recent economic reports indicate that the U.S. hit a soft patch this summer, although most analysts still predict healthy, moderate growth in the second half of 2004. "The U.S. economy's so-called soft patch is proving both softer and more persistent than anticipated," says economist Nariman Behravesh at Global Insight's Cambridge, Mass. offices. "Although we do not believe that the recovery has been derailed, growth in the second half of the year is unlikely to meet previous expectations." Global Insights now expects gross domestic product (GDP) growth in the second half of 2004 to average just below 4%, instead of 4.5-5.0%.

That continuing growth also meshes with PURCHASING's monthly business conditions survey, which tracks buyers' opinions of future business activity within the manufacturing sector and has been showing growth since 2002. While the rate of optimism slipped this summer, it remains solidly in the continued-growth range. A reading above 50 on this index indicates that the outlook for manufacturing economy is positive and below 50 indicates negativity. A July-August average of 74 definitely suggests continued future growth.

The North American manufacturing sector continued to boost activity this summer, based on separate surveys of supply executives in the U.S. and Canada. PURCHASING's index, the Institute index jointly sponsored by the Purchasing Management Association of Canada and the Richard Ivey School of Business have all shown growth for the longest sustained stretch in more than 30 years. Businesses should be the key engine of economic growth for the rest of this year, with greater fixed investment spending, still-strong export growth, and improved hiring all pulling the economy higher, says Behravesh.

Growth rates in housing and auto sectors have hit new highs but continue rising, manufacturing continues to expand but more slowly than in prior expansions. That's why some economists are scaling down their forecasts for economic growth for the rest of the year as they factor in the impact of higher energy prices and a cool-down in consumer spending.

In Canada, the outlook is a little brighter. GDP and its consumer components are sizzling. Housing, autos, and retail are doing very well. In fact, government reports note that retailers are reporting widespread gains, as shoppers have increased their purchases of everything from new motor vehicles to shoes. Manufacturing industry activity is back to levels registered in the fall of 2000, at the peak of the technology boom. So, industrial investment and production performance is robust. Most of the strength came from durable goods manufacturing, with transportation equipment accounting for more than half of the increase.

Significant gains were also registered in the machinery and computer and electronic industries. Low mortgage rates and robust demand have continued to stimulate new home construction, as new housing construction, alterations and improvements are all up. Economic momentum in the past 12 months guarantees 2004 as the best year for Canadian GDP growth in this business cycle. Clement Gignac, chief economist of National Bank Financial in Montreal says the Canadian economy should continue to gain steam in 2004-2005, eventually posting GDP growth of more than 3%.

On the global horizon, worldwide economic growth should turn in its best performance in more than 25 years and reach a 2004-2005 average of 4.5%, Gignac says.