New York, NY, Aug. 8--Although wary from rallies that never materialized and economic bright spots that quickly faded, economists are beginning to feel more confident: They have raised expectations for third-quarter growth, and say a rebound in corporate profits should prompt companies to finally boost capital spending and investment.
"All through the downturn I've felt that all that we have seen are false starts. But for the first time, I have to say, I think we're headed into the real thing," said Allen Sinai, chief global economist at Decision Economics in New York.
The average forecast of the 54 economists who participated in The Wall Street Journal Online's economic survey this month put growth for the current quarter at an inflation-adjusted annualized rate of 3.6%, up from the 3.5% average forecast in a survey conducted in June. Expectations for an acceleration in growth late this year and early next year were unchanged.
In the second quarter, gross domestic product--the broadest measure of economic activity--grew at an annual rate of just 2.4%, according to the Commerce Department's initial on the quarter, released last week.
Economic optimism is out of fashion in these cautious days--and predictions of a recovery have been wrong many times before--but economists point to undeniable signs that some segments of the economy are at least gaining a toehold: The rebound in consumer spending during the second quarter appears to be carrying over into the current quarter; auto sales ballooned to an annualized selling rate of 17.3 million vehicles in July, stronger than the 16.1 million rate for the first half of the year; and orders to manufacturers are holding at strong levels, suggesting that the rise in demand in the second quarter was more than a temporary spike.
But each of those things has been an ingredient of previous false starts, economists noted. The secret weapon this time: corporate profits, which appear to be solidly on the rise. The 1,336 companies included in the Dow Jones Total Market Index that had posted second-quarter earnings as of Wednesday reported combined net income of $115.87 billion, up from $74.12 billion a year earlier.
An overwhelming 92% of economists in the survey said they believe the rise in profits will prompt companies to boost capital spending and investment in the next six months. Such investment will be key to sustaining a meaningful recovery. But while the improved outlook should give hope to unemployed workers, economists caution that companies will be reluctant to expand payrolls for some time.
Economists expect the Fed to hold interest rates steady this year, and raise its target for the federal-funds rate above 1.25% by June 2004.
