President Jimmy Carter’s chief economist Charles Schultze used to love to tell a story about meeting with the president on the economy in the fall of 1978: The decade had been a tumultuous one with the near impeachment and resignation of Richard Nixon, the oil embargo of 1973 and runaway inflation. But things had begun to take a turn for the better, and sitting that autumn afternoon in the Oval Office, Carter wanted to know what Schultze saw as the likely scenario for the two years leading up to the presidential elections of 1980.

The economy can be expected to improve steadily, Schultze said he told Carter. “We should be okay–as long as we don’t have another oil embargo.”

That didn’t happen. But later that year, the Organization of Petroleum Exporting Countries began a series of price hikes that would double the price of oil and set the stage for double-digit inflation and a devastating recession that hobbled the U.S. in the early 1980s and contributed to Carter being a one-term president.

The same kind of “what ifs” face the nation today as we enter 2003. With almost every statistic, an argument can be made that economic growth should accelerate as the year progresses. The devil, perhaps literally, is in the unpredictable, although no longer unimaginable: the threat of another terrorist attack, the possibility that any U.S. military effort in the Middle East could become our next Vietnam rather than our next Operation Desert Storm or the specter of another Enron-style spontaneous combustion of a Fortune 100 company. But as in 1978, just because we can justifiably consider these potentials, how much weight should we assign them in our decisions?

Moving Cautiously

No doubt, these imponderables have kept U.S. companies from making capital investments or filling in holes in either their inventories or workforces and contributed to a generally wary outlook among executives. Based on Treasury & Risk Management’s most recent biannual economic confidence survey of CFOs and treasurers at the nation’s largest companies, the sentiment in corporate America is cautiously optimistic, although–perhaps surprisingly–statistically not more than it was in July of 2002, a month after the collapse of WorldCom Inc., when the magazine sampled it last. “Growth is below potential so it feels soft,” says Mickey Levy, chief economist at the Bank of America. “But it’s still perplexing as to why the psychology continues to be very negative compared to what’s actually happening.”

On the whole, economists, like Levy, are more upbeat. (See table above.) Most are predicting a lackluster first quarter in 2003, but see steadily rising growth over the following three quarters. The key to the nation’s relative strength through the past year has been the willingness of consumers to continue shelling out for homes, autos and everything else under the sun, albeit at increasingly more restrained rates. “Trend growth for consumer spending has been around 2.5%, and you don’t need more than that to give us 4% GDP growth next year,” says Cary Leahey, senior economist at Deutsche Bank Securities.

Will the Shopping Stop?

But Leahey and others see some threats to consumer confidence, which has been fraying around the edges in recent months. The primary one is unemployment, now at 6% and likely to rise another tenth or two. While historically that’s not particularly high, it is a sizable boost over the impressive low of 3.9% touched in October 2000. (See chart below.) Although the unemployment rate is typically a lagging indicator of recoveries, even more troubling is the unwillingness of companies to start hiring again. “Have we discovered the dark side of productivity gains?” Leahey asks. “Can we have a substantial increase in capital investment without an increase in employment? And can we have a robust recovery without capital investment? Probably not. But these are the $64,000 questions.”

Capital Spending’s Comeback

If the consumer looks at his fairly high level of indebtedness, he could decide that it is time to replenish his relatively anemic savings. Even without that, there are sectors of the economy, particularly auto and housing, that may be shortchanged by a buying public that feels less prosperous, despite gains in disposable income. So far, however, the consumer remains relatively fearless.

What does this mean for companies? Royal Bank of Scotland chief economist Ram Bhagavatula argues that capital spending is making a comeback, after reaching depression levels in 2000 and 2001. For instance, in 2002′s Q2 and Q3, spending on information technology was close to 8%, he notes. “The 1991-2000 expansion was atypical, driven by technology. But technological leaps such as that are unpredictable,” he says.

Deutsche Bank’s Leahey also notes that corporate balance sheets are in relatively good shape, even with the overhanging problem of underfunded pensions. “Improvement in the economy should produce an immediate increase in cash flow,” he notes. “But cash is not the restraint.” And that brings us back to Charles Schultze and President Carter and those confounded external “what ifs.”