U.S. stock markets have rallied this week to 16 month highs as investors are turning optimistic about the growth prospects of the U.S. economy.
It's not only the equity markets that have been doing well. Housing starts last month soared to their highest level in 17 years. Mike Donnally of Global Insights consulting in Philadelphia believes the economy is poised to grow at a faster pace because of tax cuts and higher government spending.
"We're very optimistic about growth for the second half of the year. We're at the top end of the range of economic forecasters," he said. "We're forecasting growth in excess of 3.5 percent for the rest of this year. And for next year we're forecasting similar growth, almost four percent growth for 2004."
In recent months the economy has been growing by less than two percent, not fast enough to produce new jobs. Since the recession ended in November 2001 the U.S. economy has lost one million jobs. Usually in the first two years of recovery the economy creates jobs at a rapid pace. Mike Donnally in Philadelphia worries that the economy is unlikely to create new jobs until 2004. He also sees another threat to the recovery.
“Yes, I think higher interest rates are the number one threat that will dampen down the housing market. Already the non-residential business side of construction is falling and will remain very weak going forward,” he said. “But that consumer side which in July was very strong is going to soften as interest rates go up.”
Interest rates have been at 40 year lows in the United States as the central bank cut short-term rates 13 times over the past two years to stimulate economic activity. Long-term rates recently have begun to rise, cooling off what has been a very hot housing market.