Most Economists Forecast A Happy New Year for US
BOSTON — The United States economy winds up 1996 in the 70th month of expanding output. And if the majority of economists are right, the economy will keep growing modestly in 1997.
The global picture is also favorable.
"The world economy has not enjoyed such a broad-based upturn since the era of global capitalism before 1914," says David Hale, an economist at Zurich Kemper Investments in Chicago.
He sees the possibility of 4 to 5 percent real growth in global output - the result of economic expansion at the same time in industrial countries, developing nations, and the former communist economies.
With 20 percent of world output, the US economy is crucial.
Although American companies enjoy their strongest competitive position in global markets since the early years after World War II, economists differ on where the US is headed next.
Some see about 2 percent growth continuing almost indefinitely, as businesses get better at managing inventories.
Others, citing factors such as demography and a strong US dollar, doubt this will become the longest postwar expansion.
Stock market analyst H. Bradlee Perry describes the US economy and stock market as being for two years "in one of those rare 'sweet spots' when everything goes perfectly." But economist Lacy Hunt calls the recovery "historically frail - consistently underperforming all other expansions."
In a way, both are right.
There has been only one other two-year period since the 1920s when stocks have experienced such a strong advance from an all-time high, notes Mr. Perry of David L. Babson & Co., investment counselors in Cambridge, Mass. Large-company shares, measured by Standard & Poor's 500 index, have risen about 22 percent so far this year. The S&P's two-year increase of 56 percent has been matched only once since the late 1920s, notes Perry. That was in 1986-87 when stocks surged 80 percent - before plunging 33 percent in the October 1987 crash. Now he sees stock prices as vulnerable to a decline in 1997.
As for the economic expansion, it has lasted longer than the average 53 months of post World War II upturns. But the growth rate has been slowest of all.
The 1.5 to 2 percent growth rate (after inflation) lacks dynamism, says Mr. Hunt of Hoisington Investment Management Company in Austin, Texas. This makes the economy subject to "outside shocks" that nobody can anticipate, such as an interruption in oil supplies. "We can continue growing, but with little margin for error," he warns.
Despite the slow growth, some economists see promise of the longest economic expansion in US history.
"The current expansion ... looks like it will continue indefinitely," maintain economists Larry Kimbell and Rajeev Dhawan at the University of California, Los Angeles. "It does not show major imbalances that typify business cycle turning points.... We do not deserve a recession, since we do not have an acceleration of inflation to reverse." They add, companies have not allowed inventories to build to excessive levels that need working down, there has been no overbuilding of residences or commercial structures, and spending by consumers is in line with their gains in income after taxes.
Not everyone thinks the business cycle has been tamed.
Mr. Hale holds that the cycle, with its recessions, is "part of the human condition.... One can assume the business cycle is dead only if [it is also assumed] that government officials and corporate managements will never again make a policy error or bad investment decision."
The 44 forecasters in the National Association of Business Economists predict 2.3 percent growth (after inflation) in 1997, on average - the same as this year. They see inflation, measured by the consumer price index, at 2.9 percent.
Some economists dissent. Richard Hokenson, chief economist at Donaldson, Lufkin & Jenrette Securities Corp. in New York, predicts a "demographically inspired downturn in consumer spending" leading to a recession in early 1997. This is because the number of Americans turning 25 years old and moving into their high-spending years peaked in March 1996 and will decline sharply in 1997.
Yet many economists would agree with Perry's list of favorable factors for stocks and the economy: (1) Inflation has been low, less than 3 percent for five years in a row; (2) interest rates remain low enough to provide only mild restraint; (3) corporate profits improved substantially - 17 percent for the S&P 500 companies in 1996; (4) American corporations have developed strong competitive positions in global markets; (5) a surge of liquidity in Europe and Japan caused a lot of money to flow into US financial markets.
On the negative side, Ian Sheperdson, chief economist at the New York investment banking firm HSBC Group, expresses concern that the strong US dollar might hurt exports. That could produce an even larger balance-of-payments deficit in 1997, drag down domestic output, and prompt a "real fight" with Japan and Europe over exchange rates.
A strong dollar may also turn away the tide of foreign investment dollars that has helped US financial markets.