Good-Times US Economy Shows Little Sign of Abating
But low unemployment could prompt the Fed to raise interest rates
BOSTON — Like the Energizer bunny, the American economy keeps going and going. Stocks hit high after high. Jobless rates keep declining. Prices may even be falling.
It's the best of times. But can it last?
Economists say the flashpoint could be unemployment rates.
If the economy keeps creating new jobs at boom-time rates, government policymakers may feel impelled to hike interest rates, perhaps as early as next month. And that could tap on the brakes.
After all, even Energizers eventually run down, though there is little sign of it for now.
"The future of our country looks very bright," says Brian Wesbury, an economist with the brokerage firm Griffin, Kubik, Stephens & Thompson Inc. "I don't see imbalances in the economy that could lead to a recession."
Federal Reserve chairman Alan Greenspan asked in a speech last December whether stock prices were showing "irrational exuberance." Mr. Wesbury sees the bull market as "rational exuberance."
Harvard University economist James Medoff's attitude is that the Federal Reserve policymakers should let the good times roll and not raise interest rates when they meet next on July 1-2.
"We should keep unemployment going down 1/10th of a percentage point a month," he says. "We probably will not see any problems with inflation until it reaches 4.5 percent."
Unemployment in May dropped to 4.8 percent, the lowest in 24 years. The news raised some concern on Wall Street that the Fed, seeing a need to preempt a revival of inflation, might feel obliged to hike interest rates another 0.25 percentage point, as it did in March.
But so far, there has been no sign of renewed inflation. So Wall Street's fear of Fed action has been waning. Investors poured $15.7 billion in stock mutual funds in May, 18 percent more than in April.
"Inflation snoozes on, and no alarm clock will sound any time soon," says David Levy of the Jerome Levy Economics Institute in Mt. Kisco, N.Y.
Producer prices fell in May, the fifth consecutive month of decline, the Bureau of Labor Statistics reported Friday.
For the 12 months through May, these wholesale prices were up a low 0.3 percent. This year producer prices have been declining at an annual rate of 3.9 percent.
Consumer price numbers are scheduled for release tomorrow.
Making fun of the rhetoric of business leaders and financiers who prefer less job growth to any "tiny bit more" of inflation, Mr. Medoff asks, Where is inflation's "slippery slope ... yawning cliff?"
Slow but steady
The latest statistics indicate the economy is slowing from its rapid pace in the first quarter.
Retail sales fell for a third month in May, the Commerce Department noted last Thursday. The index of leading economic indicators slipped a slight 0.1 percent in April, the first drop in 15 months for this gauge of future business activity.
"Never before has the inflation rate been this low this far into an economic boom," write economists Roger Brinner and David Wyss, of DRI/McGraw-Hill, a Lexington, Mass. consulting firm.
In the Alice in Wonderland world of many investors, a slowdown is a good thing. Even though hard on company profits, it keeps the Fed off the back of the economy.
Stock prices, measured by the Dow Jones Industrial Average, were up 346 points last week, to close at 7782.04, or 4.7 percent. For the year, the Dow and Standard & Poor's 500 index are up nearly 21 percent.
Still, there are a few pessimists out there. Economist Richard Hokenson sees the slippage in retail sales as confirmation that the economy is sliding into a recession.
He admits, however, that he is a "loner" among economists.
The consensus of a panel of 37 professional forecasters from the National Association of Business Economists is that growth in the gross domestic product, the nation's total output of goods and services, will slow to a "sustainable 2 percent" annual rate for the rest of this year and remain at that level in 1998.
Thus many economists agree with President Clinton when he describes the economy as "the best in a generation."
"I would give it an 'A,' " says Paul McCracken, who was President Nixon's top economic adviser in his first term.
But Mr. Hokenson says that in the post-World War II period, every time retails sales have fallen three months in a row, the economy has ended up going into a recession.
His basic argument for a slump is demographic - that there are fewer Americans in the "household formation" stage where they are busy buying all types of goods, keeping the wheels of commerce busy.
He expects the Fed to lower interest rates later this year as a slowdown becomes more evident.
On the other side, Maureen Steinburner, president of the Center for National Policy, a progressive think tank in Washington, finds demographics a reason for an upbeat view of the economy for several years to come.
A slight decline in 30-to-40-year-olds (those likely to be forming households) reduces demand for goods a little, she says. At the same time, the first of the abundant "boom-boom" youths - children of baby boomers - are just reaching age 20 where some will be looking for work, thereby increasing the labor supply.
This combination, she says, should allow the Fed to "chill it" - keep interest rates down to maintain the economic expansion. And tight labor markets should push up real wages for workers.
With jobs more abundant, many workers feel freer now to quit their jobs in search of better-paying positions.
Some 12.2 percent of those unemployed in May left their work voluntarily. A year earlier, only 9.4 percent of the jobless had quit for their own reasons.
Medoff argues that the economy today is like that of the 1960s when unemployment was much lower and so was inflation.
He says the demand for labor isn't as strong as the low unemployment numbers might suggest.
Help-wanted advertising today is 40 percent less than in 1985. So, he maintains, the pressure for higher, possibly inflationary wage hikes isn't so great.
Indeed, if unemployment does get down to 4.5 percent, the Fed should keep testing the waters for even lower unemployment, Medoff says.
Each 1/10th of a percentage point represents 130,000 people getting a job, earning money, and paying taxes.