US economic data may spell trouble


In every economic system, entrepreneurs and managers bring together natural resources, labor, and technology to produce and distribute goods and services. But the way these different elements are organized and used also reflects a nation’s political ideals.

The United States is often described as a “capitalist” economy, a term coined by 19th-century German economist and social theorist Karl Marx to describe a system in which a small group of people who control large amounts of money, or capital, make the most important economic decisions.

United States and many other countries have intervened in their economies to limit concentrations of power and address many of the social problems associated with unchecked private commercial interests. As a result, the American economy is perhaps better described as a “mixed” economy, with government playing an important role along with private enterprise.

Basic Ingredients of the U.S. Economy:

The first ingredient of a nation’s economic system is its natural resources. The United States is rich in mineral resources and fertile farm soil, and it is blessed with a moderate climate. It also has extensive coastlines on both the Atlantic and Pacific Oceans, as well as on the Gulf of Mexico. Rivers flow from far within the continent, and the Great Lakes — five large, inland lakes along the U.S. border with Canada — provide additional shipping access. These extensive waterways have helped shape the country’s economic growth over the years and helped bind America’s 50 individual states together in a single economic unit.

The second ingredient is labor, which converts natural resources into goods. The number of available workers and, more importantly, their productivity help determine the health of an economy. Throughout its history, the United States has experienced steady growth in the labor force, and that, in turn, has helped fuel almost constant economic expansion. A strong emphasis on education, including technical and vocational training, also contributed to America’s economic success.
Labor mobility has likewise been important to the capacity of the American economy to adapt to changing conditions. Today, Americans consider “human capital” a key to success in numerous modern, high-technology industries. As a result, government leaders and business officials increasingly stress the importance of education and training to develop workers with the kind of nimble minds and adaptable skills needed in new industries such as computers and telecommunications.
Many enterprises continue to operate with this traditional structure, but others have taken changing views on management. Facing heightened global competition, American businesses are seeking more flexible organization structures, especially in high-technology industries that employ skilled workers and must develop, modify, and even customize products rapidly.
Federal and state governments have developed detailed rules and regulations to ensure the safety and soundness of this financial system and to foster the free flow of information so investors can make well-informed decisions.

The gross domestic product measures the total output of goods and services in a given year. In the United States it has been growing steadily, rising from more than $3.4 trillion in 1983 to around $8.5 trillion by 1998. But while these figures help measure the economy’s health, they do not gauge every aspect of national well-being. GDP shows the market value of the goods and services an economy produces, but it does not weigh a nation’s quality of life.
A Mixed Economy:
The United States is said to have a mixed economy because privately owned businesses and government both play important roles. Indeed, some of the most enduring debates of American economic history focus on the relative roles of the public and private sectors.

The American free enterprise system emphasizes private ownership. Private businesses produce most goods and services, and almost two-thirds of the nation’s total economic output goes to individuals for personal use (the remaining one-third is bought by government and business). The consumer role is so great, in fact, that the nation is sometimes characterized as having a “consumer economy.”
The U.S. economy has changed in other ways as well. In today’s economy, the providers of personal and public services far outnumber producers of agricultural and manufactured goods.
Government activities have a powerful effect on the U.S. economy in at least four areas.

Stabilization and Growth:
The federal government guides the overall pace of economic activity, attempting to maintain steady growth, high levels of employment, and price stability.
In any event, it is clear that the American economic system does not apportion its rewards equally. In 1997, the wealthiest one-fifth of American families accounted for 47.2 percent of the nation’s income, according to the Economic Policy Institute, a Washington-based research organization. In contrast, the poorest one-fifth earned just 4.2 percent of the nation’s income, and the poorest 40 percent accounted for only 14 percent of income.

Despite the generally prosperous American economy as a whole, concerns about inequality continued during the 1980s and 1990s. Increasing global competition threatened workers in many traditional manufacturing industries, and their wages stagnated. At the same time, the federal government edged away from tax policies that sought to favor lower-income families at the expense of wealthier ones, and it also cut spending on a number of domestic social programs intended to help the disadvantaged..

Although Wall Street has shown signs of recuperating from its recent sell off this week’s batch of critical economic reports could easily shatter investors’ fragile optimism and send stocks sliding again. With few earning reports due the market will once again be fixated on economic growth and inflation as traders judge the possibility of more interest rate hikes from the Federal Reserve.
Ever since the Fed warned earlier this month that higher rates could be needed to thwart the impact of surging energy prices, investors have been more cautious than usual about letting their expectations build. Last week’s erratic trading was in evidence and they’ re still hesitant about putting money in the market; stocks had simply fallen so much that they were due for a bounce.

The key data in those reports will be their inflation measures, said Ken McCarthy, chief economist for Finance Investments. The Central bank’s mission has been to lift rates enough to support a growing economy but keep prices from climbing. Stronger-than-expected increases could send investors retreating again.

But if the growth in labor costs and hourly wages match or come in slightly below economists’ estimates, that could help carve away at investors’ skepticism.

The major indexes got a boost toward the end of last week as evidence of a slowing economy brightened the outlook for interest rates. For the week, the Dow Jones industrial average gained 1.21% , the S& P’s 500 index added 1.04% and the Nasdaq composite index rose 0.75%

Analysts say that uncertainty will linger until the Fed makes its next move on interest rates. Until then, Wall Street can only guess the odds of more rate hikes, taking cues from reports like this week’s data on worker productivity, job growth and manufacturing activity.