Confidence Is Key: Economist Cites the Importance of Business Outlook to Recovery. (the Economy & You)

By Boston, Thomas | Black Enterprise, January 2003 | Go to article overview

Confidence Is Key: Economist Cites the Importance of Business Outlook to Recovery. (the Economy & You)


Boston, Thomas, Black Enterprise


Trying to jump-start the economy by reducing interest rates even further is like pushing on a string. Despite the fact that the Federal Reserve has lowered the federal funds rate to 1.75%, its lowest level in 40 years, the Index of Leading Economic Indicators (the measure used to gauge the future health of the economy) has declined for four consecutive months. Why is the economy so anemic? One major reason is declining consumer and business confidence.

Think of it this way: Suppose you decide to make a major purchase, such as a house or automobile. If the price has been determined, two additional factors are likely to figure prominently in your decision to make the purchase. The first factor is the interest rate, which is nothing more than the cost of borrowing money. The second factor is how confident you are about your future earnings. For example, if you are concerned about job security, you are not likely to make the purchase, no matter how low interest rates might be. The same logic holds for business owners deciding whether to undertake a new investment. While interest rates are important because they affect the total return on capital invested, if business owners are pessimistic about future economic activity, even low interest rates will not be attractive enough to make them invest.

Over the past year, business owners have been more wary than consumers, so investments have lagged. Fortunately, consumer spending has carried the economy forward--even though consumers are facing record levels of debt. …

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