Experts Deeply Split Over Future of U.S. Economy
For months, the climate has seemed ominous: a fierce financial storm overseas, the ballooning trade deficit, stock market turbulence, fears that credit will dry up. Together, they paint a picture of hard times ahead.
But consider a drastically different reality, the one that most Americans continue to experience in their daily lives: Employment bristles at record heights, incomes are rising, inflation remains benign, interest rates are nestled at modest levels.
Which portrait represents the future? Take your pick. The United States has not faced such economic uncertainty for many years--perhaps not since the Arab oil embargo of the early 1970s, perhaps not even since many Americans feared a return to the Great Depression at the end of World War II.
There is not much disagreement over the near term. Most experts now expect the economy to weaken in the next few months as reports of rising unemployment, slower job creation and thriftier consumers eclipse the breezy prosperity of recent years.
Yet the experts have never before confronted a global financial crisis of today’s speed and fury. Some argue it will inevitably draw America into the whirlpool; others figure the United States is merely headed for a gentle lull on a pleasant long-term cruise.
“I sincerely doubt that muddling through is in the cards when there’s so much trouble in the world,” says Edward E. Yardeni, chief economist at Deutsche Bank Securities Inc. in New York, who is among a growing minority of pessimists. “I think we’re going to get pulled into it kicking and screaming.”
Retorts James F. Smith, an economic forecaster at the University of North Carolina: “Just because financial markets are crazy doesn’t mean that real markets are. The U.S. economy is nowhere near a recession, and I can’t imagine there will be one for at least another three years.”
Predicting how overseas woes will affect the U.S. economy is like forecasting just where a meteor will crash on Earth.
The consensus view of private forecasters is that the economy will avoid an actual recession, broadly defined as six months of declining business activity, and creep forward next year at a sluggish growth rate of 1% to 2%. This view is of some note because forecasters load their computers with a mountain of clues ranging from personal savings rates to light-truck sales to business investment in technology.
But the conventional wisdom may not mean much before a slump, particularly in a time of unique global conditions for which history offers no obvious lessons.
“You’ll never get the community of economists forecasting a recession,” maintains James F. O’Sullivan, an economist at the J.P. Morgan investment firm in New York. “It just doesn’t happen.”
O’Sullivan should know. Earlier this month, J.P. Morgan broke from the pack and became the first major firm to predict a recession for next year, albeit a mild one. Notably, it blamed tighter domestic financial conditions for the slump and played down the risk that major, new problems from overseas would be the villain.
“I’m here 13 years--and it’s only the second time we’ve done it,” O’Sullivan says of the recession forecast. “It’s not something we do lightly.”
Ingredients for Hard Times Ahead
Uncertainties abound. Macroeconomic Advisers, a St. Louis firm, declared: “The economic outlook is more uncertain than at any time in the forecasting history of this firm [16 years] or in the collective memory of those with whom we regularly discuss the outlook [which goes way back].”
Which raises the question: Could today’s novel and disruptive mix of financial pressures lead to a more severe outcome than most experts foresee, something closer to a replay of the 1930s than a garden-variety slowdown?
In recent days, some signs have turned positive: Markets and currencies have stabilized, especially in Asia. But it is not hard to see how elements of the domestic and global economies could interact in particularly disruptive ways.
Already the U.S. trade deficit is burgeoning as recession-rattled nations overseas slash their purchases of American goods and American consumers vacuum up their cheap exports. This is slamming U.S. manufacturers and putting export-related jobs in jeopardy.
Japan’s banking system remains in tatters. Brazil’s future is unclear, with many analysts forecasting a recession there that could spread to the rest of the region.
Elsewhere, China’s growth is being squeezed and its financial sector is troubled. And Russia, which remains wealthy in natural resources, could be tempted to flood the world with raw materials to get desperately needed money, turbocharging a slide in commodity prices that has already hit farmers and energy producers here and abroad.
Some fear that the economic distress in many parts of the world will spark widespread pressure for protectionist trade policies, an approach that worsened the Great Depression and would surely spark tit-for-tat responses throughout the global trading system.
“The 1930s, I think, are unfortunately very instructive for where we are now,” Yardeni says.
As some see it, the ingredients for hard times ahead are not all overseas. Household red ink, a jittery stock market and bottom-line employers who do not flinch from passing out pink slips could interact in highly destructive, hard-to-predict ways.
The great American consumer, the chief driving force behind the 1990s boom, may soon be forced to pull back sharply. Household debt as a percentage of disposable income has climbed to the highest levels of the post-World War II era, and savings rates are at extraordinary lows.
Affluent families in particular have seen their stock market windfalls slashed in recent months, wiping out wealth and reducing their confidence in the future. Already Americans have retreated from a boom-time 6% growth rate in spending, although purchases continue at historically high levels.
On top of all that, any downturn would take place in an era when American business is increasingly remorseless about layoffs. Gillette did not even wait for a poor earnings report to impose cuts: Six weeks ahead of its third-quarter results, it announced plans to slash 4,700 jobs.
“When you miss your earnings, like a Gillette, [shareholders] take you to the woodshed and pound the price out of you,” says Ronald R. Reuss, chief economist at Piper Jaffray Cos. in Minneapolis.
Between them, consumers and businesses could deal the economy a pounding if they became much gloomier about the future.
In such a case, problems in the U.S. economy would reverberate overseas, with the whole world paying a big price. Explained Yardeni: “If [American consumers] cut back on their spending, that in turn worsens the global recession.”
For all that, however, it is hard to find a reputable authority who foresees a depression in the United States. Beyond the enduring strengths of the economy itself, government policy is also emerging as a shield against hard times.
The timing of interest rate cuts may prove key. Significantly, the Federal Reserve Board has embarked on a path of lower rates even though the economy is still expanding. Typically, in advance of previous slumps, the Fed has pushed interest rates up, inhibiting all sorts of business activity.
Fed Chairman Alan Greenspan has long made clear his determination not to repeat the Fed’s Depression-era blunder of choking the money supply and lifting interest rates. Economists generally applauded the Fed’s surprise rate cut of Oct. 15, which was prompted by such warning signs as anecdotes of a credit squeeze for some borrowers and price declines in commercial real estate.
There is growing worry about deflation, fueled by worldwide overcapacity in many products, which could spread severe damage in the economy. Trouble signs have already emerged in the form of a 0.8% decline in U.S. wholesale prices so far this year. Yet so far, U.S. consumer prices continue to rise modestly, and some are doubtful about the deflation threat. Overseas, a J.P. Morgan review of 50 countries found convincing signs of deflation in only four of them.
“You tell me when Stanford University is cutting tuition and the UCLA Medical Center is charging less for a hospital bed, and I’ll tell you when to worry about deflation,” says North Carolina’s Smith.
Optimists can find bits of hopeful news even on the global level. Congress’ decision to provide $17.9 billion to the International Monetary Fund, Japan’s $500-billion bank rescue plan and an expected $30-billion IMF bailout for Brazil all are evidence that measures are being put in place to contain the global economic crisis.
“We’re beginning to see some of the big uncertainties not out of the way, but on their way to being out of the way,” maintains Allan H. Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh, who expects the nation “to muddle through” and avoid a recession.
To some observers, today’s wave of gloomy commentary is just the latest in a tradition of emotional reactions to the U.S. economy’s inevitable ups and downs.
In the mid-1990s, when a slowly recovering U.S. economy finally broke from a walk into a sprint, pundits waxed eloquent about a new, noninflationary period of global prosperity. Now, some experts contend, a few bad omens have unloosed an outbreak of apocalyptic forecasts.
“It might be useful to remind people that in 1982 and ’83 we were in the middle of a recession, and people thought the U.S. economy was all over,” observes Stanford economist Paul Romer. “Then you fast-forward to ’96 and ‘97, and people think the U.S. economy is unstoppable, that we’ll never have inflation again. There’s a pronounced tendency to overreact.”
