Why the Economy’s Glow Is Oncoming Train to Some

More Americans are working than ever before and their wages are going up. But the output of their labor from factories, farms and offices, store counters and restaurant kitchens is growing faster than their wages and that, say economists, means the economy has reached an ideal of rising productivity and low inflation.

And Labor Department statistics to be released today are expected to show an increase in jobs and a reduction in unemployment to 5.2% nationally, the lowest rate in five months. The economy is vibrant, economists say.

Yet the stock and bond markets are having a nervous breakdown, following a hike in short term interest rates by the Federal Reserve. Stocks, which fell broadly again Thursday, have lost as much in less than a week as they gained so far in 1997.

What’s going on? A convergence of contradictory economic patterns and events in an economy so huge and complex that it recalls the ironies of humorist Art Buchwald’s “good news-bad news” columns.

For example, the economy is growing right now at 3.5% to 4% a year, meaning that more than $250 billion in additional national wealth is being created. That wealth translates into opportunities for the young, secure pensions for the elderly and increased living standards for the great mass of the American people. It is undeniably good.

Yet the rapid rate of growth, in an economy that has been expanding ever since the recession of 1991-92, prompts concerns that rising inflation will return, eroding those pensions and turning the dollars earned in those new jobs to dust.

In the $7-trillion-plus U.S. economy, every sunny day contains a cloud and every cloud a silver lining. Here are more good news-bad news contrasts.

Good News: Statistics released today are expected to show that the economy in March created more than 200,000 new jobs, double the job creation rate of February.

Bad News: The Fed may well see a surge in job creation as adding to pressures on employers to pay higher wages and benefits, which could lead to higher prices in a classic inflationary spiral. The stock market could drop even more.

Good News: No such rising wage pressures have yet appeared, even in the Midwest where unemployment rates have fallen below 3% in some states. Inflation in the Midwest is running at less than 2.5%, reports economist Diane Swonk of the First Chicago-NBD bank, and there are many reasons for that. At most companies, benefits are being cut back as employers demand that employees share costs of their health insurance. Also, older workers are retiring and their replacements are being brought in to jobs at lower pay and benefits. The result of those and other factors is an overall reduction in labor costs.

Bad News: The Fed cannot simply look at today’s wage and price statistics but must think ahead to keep the economy on an even keel a year to 18 months from now. “It takes a year at least for the effect of Fed actions to be really felt in the economy,” economist Stephen Roach of the Morgan Stanley investment firm says. “If the Fed waited until rising inflation were fully evident, it would have to throw the economy into a recession to curb it.” Such inflation arises typically late in a long economic expansion because bottlenecks appear, forcing manufacturers and service companies to pay higher prices to get supplies or to hire needed workers.

Good News: There are few production bottlenecks in the economy. U.S. industry has been investing more than $1 trillion a year in information-processing equipment to speed the movement of goods and services. That’s one reason why the high-tech-rich California economy has recovered, with the San Jose and San Francisco region now booming and Southern California’s growing 3% a year, according to the UCLA Business Forecasting Project.

Also, the big bureaucratic companies of the past have been transformed by downsizing and outsourcing. “Small companies in business services now typically provide printing, software, custodial and other functions for other firms,” notes economist Thomas Lieser of UCLA. The result is unprecedented efficiency.

Bad News: Outsourcing and downsizing have contributed to reductions in benefit and wage levels and led consumers to put more purchases on credit cards to maintain their living standards. Consumer installment debt has risen more than 70% in the last two years, to very high levels. Banks and credit card companies are reporting rising delinquencies.

Good News: High debt levels are beginning to restrain consumer spending. If consumers reduce their spending, the economy’s growth rate will slow down. And that could persuade Fed Chairman Alan Greenspan not to raise interest rates again when the Fed’s Board of Governors meets in May.

Bad News: The threat of inflation is not solely a domestic phenomenon, but suddenly is emerging worldwide. The economies of Europe and Japan, which have been troubled by recession, slow growth and high unemployment throughout this decade, are now picking up speed. Such global growth means that “short-term interest rates will be rising generally” around the globe, predicts J.P. Morgan & Co. And not only short-term rates. Growth in overseas economies will spur long-term interest rates, which govern mortgages, to rise also.

Good News: The economies of Europe and Japan, and Canada and Latin America are prime customers for U.S. companies, now in good shape after years of investments in equipment and in redesigning their businesses. Productivity in U.S. manufacturing is now growing at a historic 5% a year; productivity in services is harder to measure accurately but undoubtedly is growing. The upshot is that U.S. companies and workers are ready to benefit from reviving world economies.

Bad News: Investors, whether professional money managers or amateur mutual-fund buyers, fear that good times can’t continue. And fears can be self-fulfilling. The reality at the moment is that interest rates are rising and that will increase business costs and make it harder for companies to make a profit. If profit growth slows, stock prices will continue to fall and the economy will slow too.

Conclusion: The way ahead for the economy, interest rates and even the stock market remains to be determined by an extraordinary play of contradictory patterns and events. Stay tuned.

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What Triggered Dow’s Drop

The Dow Jones industrial average has fallen about 8.5% from its high on March 11. Some of the key events in the market’s fall:

March 11: All-time high, 7085.16

Strong retail sales figures spark inflation worries. Dow drops 160 points

Dwo falls on mounting anxiety over approaching Federal Reserve meeting

Federal Reserve raises interest rates

Thursday: 6,477.35

How Good News Becomes Bad News

The stock market often finds negative ramifications in what otherwise would be considered good news. Some examples:

JOB GROWTH

* Good news: Americans set a record earlier this year for labor force participation, with 67.2% of the population 16 and older working or looking for a job.

* Bad news: Economists are concerned that an unemployment rate of about 5% or less will cause labor shortages, drive up wages and trigger inflation.

CONSUMER SPENDING

* Good news: Consumer spending continues to increase, fueling jump in retail spending.

* Bad news: Much of the spending has been funded by soaring consumer debt.

CONSUMER INCOME

* Good news: Consumer incomes are rising.

* Bad news: After six years of economic expansion, rising incomes could spark inflation, driving interest rates higher.

Sources: Associated Press, Times staff and wire reports; Researched by JENNIFER OLDHAM / Los Angeles Times