'Pretty,' Good Economy

If the United States economy were a shy, pretty girl, her ears might be turning red.

Economists are writing such lovely words about her that she would surely blush.

"As good as it gets," notes Irwin Kellner, a professor at Hofstra University in Hempstead, New York.

"Any clouds on the horizon are hard to find," writes David Wyss of Standard & Poor's DRI, a Lexington, Mass., consulting firm. "Astonishingly, this expansion is only getting stronger as it gets older."

Brian Wesbury of Griffin, Kubik, Stephens & Thompson, a Chicago brokerage firm, speaks of "economic bliss" resulting from high-tech productivity growth and sound Federal Reserve policy.

The economic expansion passed its seventh anniversary last month. Investors hope that prosperity will continue, propping up stock prices. So far, most economists do expect a happy economic scene.

Arnold Moskowitz, a New York economic consultant, predicts the Dow Jones Industrial Average will reach 9200 by mid-year and 10,000 by year-end.

This fair maiden of an economy has many fine attributes. Unemployment is the lowest in 24 years. Inflation is at the slowest pace in 32 years. Interest rates on long-term Treasury bonds haven't been lower since 1962. Productivity last year rose by the largest amount in five years. The average household enjoyed its biggest jump in buying power in 25 years.

And, stock prices have risen for an unprecedented seven years in a row.

To economists, notes Dr. Kellner, such an excellent economic performance is "absolutely astounding," because it occurred with a tight-money-supply policy and a federal budget shifting from a $290 billion deficit in 1992 to balance today.

Such policy action is supposed to slow an economy. It didn't.

For a few years now, economists have foreseen a slow winter. But it doesn't happen. So what's behind the economic glow?

For the stock market, one major factor has been corporate mergers and acquisitions, Dr. Moskowitz notes. There were almost 15,000 deals last year, with a dollar value of $900 billion. This activity has pumped some $500 billion into the stock market for each of the past three years.

These combinations often permit cost-cutting and increase earnings per share, Moskowitz holds. Profits stood at 13.6 percent of sales last year, up from 8.6 percent in 1991.

Consumer prices aren't jumping despite low unemployment. Kellner figures that corporate downsizing has forced many American workers to take second jobs. That eases job-market strains. It also makes people "very careful shoppers," restraining prices.

Computers enable many companies to produce more with fewer workers.

Low interest rates allow many homeowners to refinance mortgages, putting extra spending money in their pockets.

Two economists at Goldman, Sachs & Co., a New York investment bank, credit the "best ever" economic performance to sound management of economic policy by the government and "good luck" in the form of reduced defense outlays, lower energy prices, and cheaper imports.

The economists, William Dudley and Edward McKelvey, also point to better inventory control by business, globalization (the growth of international trade and investment), more flexible markets for labor and business equipment, deregulation of financial markets, and the tendency of company managers to align their interests with those of shareholders.

What are the risks? A budget surplus, Mr. Dudley and Mr. McKelvey worry, may "burn a hole in Congress's collective pocket." Or protectionism could grow.

Kellner asks if profits will meet expectations, considering rising wages.

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