Why economic booms are now lasting longer
BOSTON — The "dating committee" of the National Bureau of Economic Research hasn't met for years. But this group of seven economists is no matchmaking outfit. Rather, it decides when a recession starts and ends in the United States - and there's been no slump since March 1991 to force a meeting.
Indeed, this month the current economic expansion exceeds the longest peacetime upturn in US history. It has lasted 93 months, beating the 92-month period started in 1982 during the Reagan era. While a slowdown is expected next year, few envision a recession, which would make the 1990s one of the most enviable economic decades ever.
The expansion's long legs symbolize how economic downturns have become milder and shorter in the postwar era - and will likely continue to be as the nation transitions to a more service-oriented economy.
"I am convinced the expansion will not last forever," says Victor Zarnowitz, a member of the "dating committee." "But it is difficult to tell when it will end."
Most economists do see a slowdown next year. Senior corporate executives agree. They expect slower growth in sales, profits, and jobs through at least the first half of 1999, a survey by the Institute of Management Accountants in Montvale, N.J., finds.
If a recession is avoided, the expansion in another 13 months will match the 1960s expansion during the Vietnam War.
The US economy "has dodged a bullet," notes David Wyss, chief economist of Standard & Poor's DRI, a consulting group in Lexington, Mass. The stock market has recovered from its nearly 20 percent decline after July 17.
Nor has the Asian financial crisis sharply depressed US economic activity. After inflation, the nation's output of goods and services has grown about 3.7 percent this year, a husky number barely below the 3.9 percent growth in 1997.
At this time of year in 1996 and 1997, economists made forecasts of a slowdown similar to those they are making now. They were wrong. The US economy has shown extraordinary resilience. Nonetheless, few economists believe the business cycle has been overcome.
Is there a shock out there?
Benjamin Friedman, another member of the dating committee, worries about the possibility of an unexpected "shock" to the economy that the nation has not dealt with earlier. He recalls the OPEC oil embargo of 1973-74 that brought a sizable recession.
Economic policymakers, he notes, were familiar with slumps in the demand for goods and services by business and consumers. They didn't know how to deal with a "supply shock" - the cutoff in oil supplies.
Yet many economists suspect the business cycle, though not beaten, has at least been tamed.
"We have learned some things over the past 20 years," says Mr. Friedman, a professor at Harvard University in Cambridge, Mass.
In other words, future business cycles may resemble ripples rather than waves. Already, in the postwar years, expansions have gotten longer on average, though still uneven in length.
Several factors underlie optimism for the future. One is that services are a much bigger factor in the economy. These activities are less volatile than manufacturing or construction. If people feel cautious about the economy, they're more likely to continue going to a salon to get their hair cut than to sign a contract for redoing their kitchens.
Today, services account for almost 80 percent of American jobs. The demand for many services remains nearly constant in downturns. In the 1990-91 recession, manufacturing output dropped 3 to 4 percent, while the output of services did not decline.
This year, manufacturing has been hit hard by currency devaluations and a slump in Asia. US manufacturing exports have declined. In November, manufacturing payrolls fell by 47,000. Hours worked declined 0.6 percent.
At the same time, employment gains were strong at restaurants, mortgage brokers, computer services, and temporary help agencies. The total payroll for private services rose 252,000. As a result, the unemployment rate dipped to 4.4 percent, close to the 4.3 percent of last spring and the rate in the late 1960s.
Another factor in softening the business cycle could be better government policies this decade.
"The Federal Reserve gets very high marks for steering an even course," says Friedman. "It has learned how not to overstimulate the economy."
Fiscal policy - that is, using changes in taxes and spending to manage economic growth - has been on hold as the US struggled to balance the federal budget. Now there is a large surplus in the federal and most state budgets, but policymakers are unlikely to use government spending to direct the economy.
A third factor in making the economy run more evenly is the better control of inventories with computers. The ratio of stocks to sales in manufacturing has fallen dramatically in the past 10 years as firms learned to match output with sales. So swings in inventories are smaller and have less impact on the business cycle.
Other economists speculate that the decline of unions has made the economy less vulnerable to downturns. Labor markets are more flexible. Unions have less power to force up wages. Thus inflation is less of a threat, and the Fed isn't as likely to raise interest rates to stop inflation.
Concern that the economy might slow next year arises from the possibility that some elements supporting the expansion may, as Friedman puts it, "run out of gas." These include high levels of investment by business, the willingness of consumers to take on debt to buy goods and services, wage restraint, and strong corporate profits.
"All these factors can't go on forever," says Friedman.