Good times keep rolling, but ...
The most sensitive indicator of the economic outlook is the trend in the changes that professional forecasters make in updating their prognostications. On the basis of my unscientific but substantial sampling of the latest forecasts, I can report that most forecasters have raised their estimates of real growth for 1999 - and without upward adjustments in their expectations of inflation.
It is unlikely that 1999 will set new records. Nevertheless, an expansion in real terms of about 3 percent is expected and noteworthy. Many analysts had expected a significant slowdown after the torrid pace of almost 4 percent in 1997 and 1998. Inflation is generally anticipated to remain below 2 percent, as it did last year. The likelihood of recession in 2000 also has been downgraded substantially.
What accounts for this sanguine outlook? Many will claim credit - and with justification. The Federal Reserve System surely can be proud of relative price stability in the face of unusually rapid expansion in production. Yet until the three reductions in interest rates late last year - of a quarter point each - the Fed stayed on the sidelines. In retrospect, such modesty and reticence was most appropriate and should characterize the rest of 1999.
On the other hand, the turmoil in the nation's capital did not seem to affect the rest of the country.
I would give the private enterprise system much of the credit for the current health of the economy. However, Asia's misfortune has, so far, turned out to be somewhat beneficial to the US. Americans have benefited from the downward pressure on price levels from cheaper Asian imports. During much of 1998, economists viewed this phenomenon as the key to the absence of Fed interest rate increases during a period of rapid economic growth.
As practitioners of the "dismal science" - as Ronald Reagan liked to call it - economists point out potential clouds on the economic horizon. For example, though most of the East Asian economies seem to have hit bottom and are beginning slow upturns, a relapse is still quite possible.
The possibility of a major currency devaluation by China also comes to mind. Because Chinese authorities are aware of the adverse repercussions that would occur in their part of the world, they are trying to avoid such action. Japan seems finally to have taken the actions necessary to revive its stagnant economy, but the recovery process could turn out to be extended and uneven.
These possibilities could generate negative consequences for the United States, ranging from serious disturbances in currency markets to a further run-up in our already large trade deficit.
Here at home, shocks in financial markets - especially in stock prices -could sour the currently positive attitude on the part of investors and consumers. The ability of government to do damage to the economy should not be underestimated. The mere expectation, for example, of adverse action by the tax-writing committees could produce havoc in bond and stock markets.
Yet political developments could help to continue the expansion in the short run. Both Democratic and Republican candidates for the presidency are likely to promise a combination of tax cuts and spending increases. Republicans can be expected to press for general tax cuts and higher military budgets; Democrats undoubtedly would counter with proposals for all sorts of expensive civilian initiatives coupled with selective tax breaks for favored constituencies (and more complicated tax forms). Of course, evaporation of the budget surpluses would come a little later.
In retrospect, gridlock in Washington has been good for the economy insofar as it has resulted in avoiding these budget busters. We can speculate as to whether today's budget surplus would have been achieved if either party had controlled both the White House and Congress. In any event, Congress cannot outlaw the business cycle. Thus, it seems appropriate to enjoy the current prosperity, whatever the prospects for change might be.
*Murray Weidenbaum is chairman of the Center for the Study of American Business at Washington University in St. Louis.
It is unlikely that 1999 will set new records, but an expansion in real terms of 3 percent is expected.