White House Cuts Growth Forecast by One-Tenth Percent

The Bush Administration on Wednesday revised its estimate of economic growth, shaving 0.1 percent from its forecast issued at the end of last year, when it said the United States economy would grow by a robust 3.5 percent.

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Generally speaking, the phrase "the economy will grow by..." refers to growth in gross domestic product, which is a measure of the total value of all final goods and services produced in an economy during a specific period of time.

  The news that Mr. Bush's Council of Economic Advisers still sees no recession in sight gave some independent economists pause as an accumulation of evidence points to a considerably more dramatic slowdown in the months ahead. Last week's anemic growth in job formation—a mere 78,000 new jobs were added to the economy during May—coupled with lagging industrial output and other worrisome signs, have had investors on Wall Street on edge. In stock trading yesterday, equities were up dramatically by mid-day but surrendered just about all of that gain by the closing bell. Today, stocks drifted lower, partly on the White House revision of economic growth, but also because of general wariness about what Federal Reserve Chairman Alan Greenspan will say tomorrow in testimony before Congress.

Rumors have been circulating for days that the Fed will give the economy a breather from the year-long hammering of hikes in short-term rates the Fed has instituted to battle inflation. Skeptics, however, doubt that the central bank has much leeway to ease off its contractionary monetary policy regime, given that evidence of mounting inflation pressures have not gone away. Even the White House admitted today that its original estimate of inflation needed upward revision because of the persistently high price of crude oil, which closed today above $52 per barrel, a level that continues to defy forecasts earlier this Spring that oil prices would fall back below $40 per barrel some time during the Summer.

In corporate news, automaker General Motors has taken center stage with a one-two-three punch, beginning yesterday with an announcement that it plans to cut 25,000 workers from its U.S. payrolls by 2008. At about the same time, it made public its plans to build a $387 million auto factory in China to take advantage of that country's relatively cheaper production factors and artificially weak currency, which will give GM a pricing advantage as it exports cars built there back into First World countries, particularly the United States.

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Announcements of planned layoffs are often viewed favorably by investors because of the possibility that lower operating costs will mean higher profits.

  In the third leg of GM's trifecta, Tracinda Corp., headed by financier Kirk Kirkorian, disclosed that it has reached 18.9 million shares of a $31 per share, 28 million share tender offer for the automaker's common stock. The nearly 19 million shares now held by Tracinda put its stake in General Motors at a little over seven percent. All of this was seen by Wall Street investors as good news, and GM stock rose today by more than four percent.

While many investors see the cost cutting measures and the interest of Kirkorian as positive signs for the giant automaker, some analysts are concerned that GM has jumped on the move-operations-to-China bandwagon too late. For years, the Chinese central bank has had an open policy of fixing the exchange rate of its currency, the yuan, at eight to the U.S. dollar.

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When a country's currency is "weak" relative to the currencies of its trading partners, its exports will be cheap in those other countries.

  To maintain this inflated rate, the Chinese must routinely and aggressively enter global currency markets to purchase greenbacks with yuan, thereby building a global supply of yuan far in excess of what the Chinese economy could use without incurring massive inflation. Ultimately, or so monetary theory goes, those yuan pooled in global currency markets will eventually have to wash back to the shores of China, where they will create severe inflation. Although the Chinese government, long known for its short-term solutions that include repression of undesirable activities,

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Trying to stop inflation through wage and price controls has been tried by many countries, but it cannot work because it doesn't address the underlying cause: too much of the nation's currency in circulation.

  may impose wage and price controls in a futile effort to prevent the inflation, the only effective, long-term solution is crushing the growth of the money supply, a move that will drive Chinese interest rates—which will already be rising as inflation expectations are stamped into them—sky high. Businesses operating in such an environment will find themselves dealing with factor costs that are trying to rise at the same time high interest rates are making new plant and equipment investment unattractive.

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Persistent expectations of inflation cause interest rates to include an "inflation premium" to compensate lenders for erosion of future purchasing power of the money they lend.

  The likelihood of a stagflation like that seen in the United States at the end of the 1970s is quite high, with a deep recession following, one that would turn what had been a plan by General Motors well-rewarded by Wall Street into the epitaph for that company's tombstone as chiseled by a future generation of investors dumping the stock, possibly in the same time frame that the Chinese Communist Party and its corporate benefactors are facing the wrath of a billion Chinese citizens who had come to the edge of hope for middle-class comfort, only to see those prospects evaporate in economic depression and violent political repression.