U.S. Economy at Turning Point

Are we on a way to Dow 10,000?

Optimism rapidly spread on U.S. economic recovery as the Dow Jones industrial average entered yesterday‘s stock trading at NYSE above 9,000 for the first time in 10 months.

Yesterday, the Dow Jones industrial average closed at 9,038.98, up 1.3% while the tech-heavy Nasdaq jumped 1.94% to close at 1,634.65. This is the highest close in 12 months. The Dow fell below the 10,000 mark on April 26 last year and plunged further from 9,000 on July 12 the same year.

Accordingly, Japan‘s Nikkei Index recovered to the 8,600 mark in three months, closing at 8,657.23, up 1.16% from the previous day.

This upturn in the stock market reflects diminishing uncertainty over the post-Iraqi war global economy as well as rising expectations that the Bush administration`s tax relief measures will jumpstart the U.S. economy. According to a recent survey by the U.S. Investors’ Intelligence, only 20.7% of stock market analysts forecast the New York Stock Exchange would see stock prices go down further.

Recent economic indicators are also fueling widespread optimism over the economy. The U.S. Institute for Supply Management (ISM) showed its service sector index at 54.5, up by 3.8 point in May, which recorded the highest growth since May of last year. A service sector index, above 50 points, implies that the economy is on an upward curve. The U.S. Labor Ministry announced earlier that productivity growth rate in business sector had grown to 1.9% in the first quarter of this year, which was beyond the anticipated 1.6%.

In a video speech at the International Monetary Conference, held in Berlin on June 3, Alan Greenspan, Chairman of the Federal Reserve Board (FRB), said, “these economic indicators shows the gradual stabilization of the U.S. economy”, and added, “the possibility for deflation in the U.S. is slim.”

On the other hand are precautions against immature optimism. John Silvia, chief economist at Wachovia Securities noted: “The U.S. is showing a trend towards growth, but the enhancement in productivity is mainly a result of job cuts. When the number of joblessness grows, the nation might not be able to sustain its growth momentum.” The foreign press reported that the unemployment rate in the U.S. soared to 6.0% in April and is expected to stand at 6.1% in June this year.

Ki-Tae Kwon kkt@donga.com