Congressman Nick Smith, June 2, 2002

In spite of the September 11 attack, and the many international problems from Israel and Palestine, to India and Pakistan, consumer demand has remained firm. Housing starts in the U.S. have increased. The economy was aided last year by good weather, tax refunds, and automotive sales incentives that resulted in strong spending November through February. Many economists predicted that those events encouraged spending that would replace future spending. So far, however, the slowing has been modest. The American consumer continues to be optimistic and keeps coming up with money to spend - some from the tax cuts, some from home refinancing, and some from a very modest increase in personal income. Most of our budgeteers in Washington now do not anticipate a major slowdown in consumer spending.

Business spending is a different story. Investment for building up inventories and new equipment remains sluggish. Durable good shipments have shown no substantial increase. Business is still nervous because of last year's falling profits, the decline in the stock market, and the still unfolding accounting scandals. Sluggish economies overseas have not helped with exports. Even with continued consumer demand, rebuilding corporate America's confidence is going to be slow. That's going to take higher profits and no negative news events. Commercial construction, unlike residential construction, has been in a downturn. In Jackson, Battle Creek, and other cities of the Seventh Congressional District, vacancy rates are high for both office and commercial space, and that will probably continue until business expansion leads to new hiring.

On the government side, many economists say federal government spending helps support the economy. It would be my contention that increased money from taxes and borrowing, however, is not as efficient as having the money in the hands of individuals and business to generate new economic activity. In Michigan, state and local spending is in a major slide. Governor Engler and the legislature must come to terms with major shortfalls in revenues. They will probably accommodate that mostly with cuts in spending, but also, I suspect, with hidden taxes such as increased user fees.

Savings and investment are important. If the economy performs as I'm guessing, then the Federal Reserve is likely to leave the funds rate around 1.75% and the stock market will have modest ups and down without significant movement. A year ago, I advised in one of my columns that the government I-Bond was inflation plus 3%. That resulted in about a 5% interest rate. The new I-Bond rate is inflation plus 2%, which is predicted to be about 2.6%. Even so, it is something you might consider to ensure a return above inflation.

As I told a graduating class this week in Reading, I'm not optimistic on the economy over the next couple years. But for those attending college, I think they'll see a much stronger economy by the time they graduate. Let me wrap up this pessimistic column with downside risks. Another terrorist attack, a flaring up of problems in the Middle East, or a run up in oil prices could stall the recovery. Accidents such as the train wrecks we've now seen in California, Detroit, Florida and now Potterville add to business unease. A war against Iraq could also complicate the economic situation. The economy, though stronger than last year, isn't out of the woods yet.

Congressman Nick Smith, a Republican, represents Michigan's Seventh Congressional District.