End of the boom-bust economy?
Inflation is moderate as growth continues. Thank tech revolution, savvier management.
Consider this scenario: It is 2010. America's economic expansion has stretched almost 20 years. The national debt is mostly paid off. People look back at the economy's "soft landing" a decade earlier with a certain reverence for Alan Greenspan. He still heads the Federal Reserve, and is considered a good example of Americans' greater longevity. Prosperity is rampant. Inflation remains low.
Even Mr. Greenspan wouldn't venture to forecast that far out, but if the past decade is prologue, more good times lie ahead. And in fact, no prominent economist is forecasting a big slump in the next year or two.
Instead, economists generally foresee what they call a soft landing - actually a gliding into 3.5 percent annual growth or so - rather than veering into either recession or too-fast inflation.
"We don't have to slow much to touch down on the runway. We are almost there," says James Glassman, chief economist at Chase Securities in New York. "You can make a case for growing for another decade and not sound like a kook."
Of course, that doesn't mean the risk of recession has been banished. But some experts see benign influences that bode well for years to come: deflation in the costs of communications and computing, a Fed that has learned policy lessons well, and businesses fine-tuning inventories to avoid cyclical swings.
"Other than unavoidable shocks from outside and beyond our control, there is no real inevitability of recession," says Robert DiClemente, an economist at Salomon Smith Barney.
Evidence of a slowdown in the economy has been building. Home-construction fell in July for the third straight month. Private-sector job growth was a mild 138,000. And while factory orders rose a husky 5.5 percent in June, the pace mainly reflected a surge in aircraft and other transportation equipment.
And, even while retail sales rose a stronger-than-expected 0.7 percent in July, inflation appears tame, with a report yesterday putting consumer prices up 0.2 percent last month.
Moreover, productivity surged at a 5.3 percent annual rate in the April-to-June quarter, well above expectations and running at a 16-year high. That creates some leeway for businesses to deal with higher costs (such as wage hikes) without raising consumer prices.
All this means the Fed won't need to raise interest rates again when it meets on Aug. 22, says Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson in Chicago.
With higher interest rates squeezing many indebted consumers and businesses, Mr. Wesbury foresees the economy slowing to 2 percent annual growth.
"It is going to feel like a recession," with increasing bond defaults, bank loan losses, and other debt problems, he says.
Others say the soft landing isn't quite here yet.
Mr. DiClemente sees faster growth and two more interest rate hikes this year. "The economy still shows incredible resilience," he says, pointing to business spending on equipment.
Long-term, experts are optimistic about the health of the American economy, in part based on past experience. The last recession, in 1990 and 1991, was mild and lasted only nine months. The economy, steered by the Fed, came through an Asian financial crisis and a Russian currency devaluation without serious harm.
Today there is some expectation that Washington will not make major economic policy mistakes in the future. Inflation will remain modest. The Fed won't slam on the brakes hard. Congress won't sharply shift taxes or spending or move to a protectionist trade policy.
Another major element in current optimism is technology and its major boost to productivity.
Futurist Ray Kurzweil sees the Fed's models as outdated, not taking into account the deflationary impact of exponential change.
The economy already could grow faster than 3.5 percent a year without inflation, he says. By 2010 it could grow 10 percent a year without boosting average prices. "We should let it do so."
Technology ripples broadly through the economy, he argues. Speech-recognition software, for example, cost $5,000 in 1985, could recognize 1,000 words, and had a poor accuracy. Today it costs $50, deals with 100,000 words in continuous speech, provides good accuracy, and takes five minutes of training.
Similar exponential trends are occurring in data transmission, wireless data services, and so on. And the Internet is eliminating middlemen from consumer and business transactions.
Further, a more educated workforce accepts change far more rapidly, says Mr. Kurzweil, president of Kurzweil Technologies in Wellesley, Mass.
DiClemente says information technology also gives businesses better knowledge of markets, shorter product cycles, and more control over inventory. "A lot of cyclicality in the economy has been whittled down," he says. An inventory recession - where businesses overproduce and then suddenly cuts output - seems "very unlikely."
"No one wants to say we have brought the business cycle to an end," he says. But the "technological revolution has provided the information necessary to avoid mistakes."
(c) Copyright 2000. The Christian Science Publishing Society