Labor Day is a holiday in America that honors the country's workers. This past year has been a little hard on workers as accounting scandals and bankruptcies resulted in numerous layoffs across the U.S. economy. But workers may be getting some good news as signs point to an economic recovery.
New data from the U.S. Commerce Department confirms the American economy was sinking even before the September 11 terrorist attacks in the United States. But a rash of corporate scandals led U.S. consumer confidence to plunge in July, according to the Conference Board, a private research firm. Consumer confidence affects consumer spending, and consumer spending accounts for about two-thirds of the nation's economic activity. Merrill Lynch senior economist Gerald D. Cohen says despite the drop, there are still some positive signs for the U.S. economy.
"Well I think it's important to differentiate between the official measures of consumer confidence and what consumers are actually doing and feeling," he said. "The fact is while consumer confidence fell, auto sales were at an 18.1 million rate, which is the fifth highest rate on record."
However, Georgetown University securities law professor Donald Langevoort believes American business officials are still uncertain about the depth of consumer demand.
"My sense is that we haven't yet seen the end of consumer uncertainty and that if people start looking at their stock portfolios and saying, 'Gee my retirement isn't as safe as it used to be,' the willingness, even in the face of low interest rates, to buy big ticket items may not be there," he said.
Consumer confidence and spending patterns are also buttressed by the creation of new jobs. According to a U.S. government report, 50,000 new jobs were added in the service industry in July. However, that gain was largely offset by cuts in the construction industry, which lost 30,000 jobs.
The lackluster jobs report caused stocks to tumble on Wall Street prompting concerns that the economy was not turning around as quickly as hoped. Professor Langevoort says the stock market reflects economic reality and there is no reason to expect the stock market to return anytime soon to the inflated levels that it was at from 1999 to 2000.
"I think that what we're learning is that the exuberance that drove the stock market that high was more hope than reality and therefore the decline we've seen is just what economics teaches, that stock prices do drop and hope disappears," he said.
The tumble in stock prices was also influenced by a series of accounting scandals in corporate America. For example, the accounting scandal that affected the energy-trading giant, Enron resulted in the company's bankruptcy, costing employees jobs and pensions.
American companies WorldCom and Global Crossing, two telecommunications companies, and K-Mart, a national retailer, also trooped into bankruptcy courts seeking protection from creditors.
Senior Fellow at the Cato Institute, Alan Reynolds says what caused a number of these companies to get into trouble was perhaps a little bit too much enthusiasm for new technology as well as the purchase of other companies, creating a large amount of debt. He blames U.S. tax policy.
"Our tax code biases the system in favor of debt and against paying out dividends in many ways, and so when companies got a little cash, they'd buy up another company, and buy up another company, and buy up another company and they did a lot of that with debt," he said. "And now they have to make the interest payments. If it was a dividend payment, they could always cut back, but you can't cut back on interest payments except going bankrupt and that's what's happening."
The scandals influenced the U.S. Congress to enact the most far-reaching crackdown on business fraud in 70 years. The new corporate reform law intends to rein in corporate wrongdoers and toughen oversight of the accounting industry. Under the bill, a corporations' chief executive officer or chief financial officer who certifies false financial reports could get 20 years in prison or be fined $5 million.
Professor Donald Langevoort says the legislation will give investors some confidence, but doesn't expect any court cases in the near future. "I think it will take a year or two for those prosecutions to occur to send the signal the SEC wants to send," he said. "I don't think it's going to be an instant fix, but I think in a year confidence in the integrity of the market should be much higher."
Professor Langevoort says greed and the drive to maintain high stock prices have been the motivating factor behind the recent rash of corporate scandals.
"Executives at Enron, WorldCom, were being paid $10-$20 million a year sometimes for their work," he said. "And under those circumstances getting a high stock price was the way to keep your job and get even more money. With that, people were willing to do things they shouldn't have to push stock prices higher. That's greed I suppose."
He says greed is not new in corporate America. But what Professor Langevoort says has changed in the last decade has been the amount and manner of executive compensation.
"The amounts are stunningly larger than they were even in the 1980s and they come in the form of stock rather than cash and therefore if you're getting stock, your incentive is to do what it takes to move stock prices higher and higher and sometimes that involves fraud," he said.
Another factor influencing the well-being of the U.S. economy is the ability of companies and banks to borrow money. The U.S. central bank addressed that issue last month by keeping its key interest rate unchanged at a four-decade low of 1.75 percent. The key interest rate is what the Federal Reserve charges major banks that borrow money. Professor Langevoort says this decision indicates the U.S. economy is fundamentally sound.
"Productivity is growing, so I'm perfectly comfortable with the Fed saying we'll hold steady, but we'll watch very carefully," he said. "If the economy shows signs of further stagnation, we'll see interest rates go lower and the Fed opening the windows so that more money runs into the system."
However, Gerald Cohen at Merrill Lynch says the economy may not be so fundamentally sound. That's because he believes uncertainty about the future is hampering the economy's attempt to pull out of the recession that began before September 11.
"We have been slowly coming out of that recession and I think one of the issues right now is the stock market and issues of corporations and uncertainty about corporations and their spending that has caused the economy to remain on a slower growth trajectory," he said. "We're still rebounding, it's just much slower than in past history."
If Americans are still spending money, whether slowly or steadily, much of the spending is for imported goods. As a result, the U.S. trade deficit decreased slightly in June to $37.2 billion. Still, it's the second biggest on record and experts believe it's a sign of an improving economy.
The Commerce Department says the June imbalance between what America sells abroad and what the country imports was down a tiny 1.8 percent from the record high of $37.8 billion set in May. Mr. Cohen says that's a good sign for the U.S. economy.
"What it does mean is that we are meeting more of our demand from abroad and that means there's less production here," he said. "But it's really in some respects a sign of the strength in the U.S. economy versus the weakness everywhere else. Rather than a sign of weakness in the U.S. that we're demanding all the foreign goods."
U.S. exporters have been hoping that the recent weakening in the value of the dollar will help them in coming months. A weaker dollar makes U.S. products cheaper abroad and so should boost overseas sales.
In the end, Gerald Cohen says all these factors add up to an economy that's improving at a modest rate.
"Yes, we do think it's going to be a fairly modest recovery relative to history," he said. "On average, the U.S. economy grows 7 percent the first year of recovery and we're looking for growth around half of that."
Alan Reynolds of the Cato Institute is also positive about the future, even if some signs seem ominous.
"Yes, I'm optimistic because companies are doing what they have to do and it's painful but it works," he said. "They are paying off their debt and that means you stop doing a lot of investing for awhile. And yes, sometimes they're laying off workers because labor costs are problemsome too, but those two things are in fact working to reduce the unit cost of labor and credit and free up some money for doing other things. It's slow, but it's happening."
One of the consistent bright spots of the U.S. economy has been the housing market, which even performed well during last year's recession. The driving force behind the solid activity has been low interest rates. The U.S. Commerce Department says new home sales shot up by 6.7 percent in July to the highest monthly level on record. Analysts say housing is a better investment than stocks, for now at least, because home values are rising sharply, in contrast to the sluggish stock market.