Uncertainty about the election, interest-rates, and oil prices has contributed to stock market weakness in recent months. Fortunately, economic data continues to suggest a strong economy in the second half of 2004.

At least some of the jitters about the outlook are exaggerated, a glass-half-empty reaction to uncertainty. On interest rates, people worry about today’s very low rates, which raise inflation risks, and the prospect of higher rates.

On the consumer, people – sometimes the same ones – worry about too much consumption showing up in the trade deficit and about a slowdown in consumption.

On the election, both political camps worry about the other guy winning the presidency. Looked at in a glass-half-full way, one of the currently unhappy camps is going to be pleased with the outcome and think better of America after November.

These uncertainties come despite very fast growth over the last year – gross domestic product growth in the four quarters through June was as fast as any four quarters in the 1990s – and signs that fast growth is continuing.

In July, housing starts (1.98 million annual rate) and building permits (2.06 million) surged from the already-high levels prevailing over the last year. July’s retail sales set a new record at $336.5 billion, continuing the strong 6.8% annual growth trend established in 2002. The household survey of employment showed 629,000 new jobs in July and a 5.5% unemployment rate, both suggesting a strong labor market. The rise in consumer confidence in recent months also underscores the ongoing improvement in labor conditions. Business spending on equipment grew 12.8% in the second quarter from a year earlier, maintaining its fastest pace since the late 1990s.

Non-farm proprietors’ income – which includes small-business profits – has been growing very fast, generating unexpectedly strong growth in government tax receipts but also creating the likelihood of fast economic growth going forward.

The June trade deficit hit a new record at $55.8 billion. While some emphasize the negatives, I expect record trade deficits to continue as long as America is outgrowing the rest of the world – imports go up with the strength of the American economy while exports can only go up as foreign economies grow.

Capacity utilization remains at low levels (77.1% in July, up only slightly from a revised 76.9% in June). I don’t think this suggests slower growth ahead. There are many difficulties in extracting value from this data, including the limited portion of the economy it covers, the economy’s transition to shorter-lived investments, the difference between average capacity utilization due to a few dead sectors versus sector-by-sector capacity limits, and the important distinction between physical capacity and economically useful capacity.

Stock prices are an important leading indicator of an economy. Historically, however, equity declines have occurred much more frequently than economic slowdowns – which seems to be the case this time. I think the economy will grow faster in the second half of 2004 than in the first.

Even if it slows, however, the economy is not fragile. It has several key shock absorbers that would cushion a slowdown. Expensive oil is a heavy and increasing burden on the American and global economies. If growth slows, oil prices should soften, providing a cushion. Bond yields and mortgage rates vary with the economic outlook.

A slowdown would lead to lower rates, softening whatever negative effect has taken place over the last year. Fed policy appears to respond to the economic outlook rather than just focusing on inflation or my preference, the value of the dollar.

A slowdown would soften expectations of rate hikes. The ratio of inventories to sales remains at a record low 1.3 – meaning it would take only 1.3 months to sell out of inventory at the current pace of sales. Corporate balance sheets have strengthened substantially since the 2001 recession. This would provide a relatively deep cushion in the event of an unexpected slowdown.

There is a distinct difference between this expansion and the one in the late 1990s. This one is more durable. The dollar’s value is in mildly inflationary territory rather than in deflationary territory. Real and nominal interest rates are low rather than high.

Key growth-oriented tax rates have declined. Household and corporate balance sheets have generally lengthened their maturities and locked in lower rates. Foreign growth is on the upswing. This is not the stuff slowdowns are made of. But if one occurs, the shock absorbers will temper it.