Has the U.S. Economy Entered a Golden Era?
WASHINGTON
Like a centenarian on steroids, America’s economic boom is closing in on the longevity record with no sign of slowing down. Unless something goes unexpectedly haywire, next January it will become the longest upswing in U.S. history.
Is it a freak, the economic equivalent of a 100-year flood? A growing number of experts think not.
Not only will today’s good times roll longer than ever before, according to this view, but the traditional cycle of boom and bust will never be the same again. Economic expansions of the future will be longer than they used to be, and the anguishing interludes known as recessions will be milder, shorter and rarer.
This is hardly the first time that a particularly robust boom has prompted cheery predictions. Previous bouts of smug optimism were followed by the Great Depression, the stagnation of the 1970s and other dismal returns to reality. Even if nothing goes wrong inside the U.S. economy, overseas events such as the oil shocks of the 1970s are always a threat to knock it out of kilter.
But this time, many experts say, things just might be different. One sign: The American economy proved impervious to the financial crisis that started in Asia in 1997 and spread to much of the rest of the world.
“The longer this expansion lasts, the more you start to think there’s something to this idea,” said Princeton University economist Alan Blinder, former vice chairman of the Federal Reserve Board. “Do I think that recessions will be less frequent and less severe in the 21st century than in the 20th? I think the answer is probably yes.”
The case for a brighter economic future rests on several observations:
* The Federal Reserve, learning from past mistakes, runs the nation’s monetary policy more effectively than before. Last fall, for example, the Fed suddenly reversed course and cut interest rates at the first signs that overseas financial turbulence was hurting U.S. credit markets.
* Computer technology has revolutionized the way private industry manages the flow of products and materials. Disruptive pile-ups of unused goods and bottlenecks caused by shortages--historically major causes of economic instability--appear to be less of a threat these days.
* The bond market has become an increasingly important shock absorber. With abundant information at their fingertips, private investors are better able to anticipate Fed policy shifts--and their quickness in adjusting interest rates accordingly helps keep the economy on an even keel.
* The increasingly important service sector is less prone to wild ups and downs than the factory-dominated economy of yesterday, suggesting that service employees may be less vulnerable to layoffs than their factory counterparts.
To Sung Won Sohn, chief economist with Wells Fargo Bank in Minneapolis, the availability of cheap, fast information is key.
Bond investors, for instance, are behaving in a similar manner to purchasing managers or even Federal Reserve policymakers: All can respond to events in the real world more effectively than ever with the help of the Internet, round-the-clock news and information about global events and specific industry concerns.
“Financial market participants--and people who buy and sell goods--are able to make quicker and more intelligent decisions,” he contended.
Sohn might have been talking about Jay’s Luggage, a retailer based in Canoga Park. Its managers rely on computer technology provided by Retail Technologies International, a Sacramento-area firm, to track which items are selling and which are not--and to gauge their own purchases accordingly.
Several years ago, “We couldn’t tell if one store had sold five red suitcases in the last five months and another store had sold one red suitcase in the last five months,” recalled R. Jack Ruthbard, president of the family enterprise. “When you’re running a business with a pencil and a note pad, it was impossible” to keep the sort of minute-by-minute accounting of resources that is now routine,” he said. “Time didn’t allow for it.”
Multiplied throughout the gigantic U.S. economy, such examples translate into smoother-running supply channels, fewer items that gather dust on warehouse shelves, more profitable retailers and happier consumers. They also help shield workers from layoffs caused by bottlenecks in production when shortages caused by inadequate planning bring assembly lines to a halt.
The Internet, meanwhile, is matching up sellers who once would have been saddled with excess inventories and buyers who would have searched unsuccessfully for those same goods.
“You might have a surplus of something in Los Angeles that somebody needs in Zimbabwe,” noted Jon Schreibfeder, an inventory management consultant in Dallas. “You stick it on an airplane, and it’s there in 48 hours.”
Others give much of the credit to the Fed for the upturn’s strength and longevity. Since the 1980s, the Fed has fought inflation with great success, making it virtually impossible for firms to pass on price hikes and further restraining wage increases, said Mickey D. Levy, chief economist with Bank of America Corp. in New York.
As a result, he maintained, companies have been under tremendous pressure to become more efficient and productive.
“I would say the economy is performing better--but it’s performing better in large part because the policymakers are pursuing the right policies,” Levy said. “People have grossly underestimated the economic benefits of a stable, lower-inflationary environment.”
There also is the matter of the modern economy’s makeup. The service sector, including software and communications technologies, money management and health care, is providing employment to a growing share of the work force. Service providers may be less prone to disruptive ups and downs than auto and steel makers.
Questions remain. With lifestyles changing, economists wonder whether the service sector will remain a source of stability in hard times if well-heeled yuppies cut back on restaurant meals, international travel and other nonessential spending.
“Up until now the demand for services has fluctuated much less cyclically than the demand for goods,” Blinder said. “It’s an interesting question whether that will always be true.”
Nor is it clear that the historic causes of recession should be dismissed. Typically, past recessions have been ignited by external shocks, such as skyrocketing oil prices, or by Federal Reserve decisions to push up interest rates to kill inflation. Few would suggest that the United States is immune from a future surprise, which could range from a war to financial turbulence to year 2000 computer snags in foreign countries.
And few would suggest that the Fed, despite widespread respect for its chairman, Alan Greenspan, is incapable of a disastrous policy mistake.
Are upturns reliably lasting longer? “Put me down as a skeptic,” said Allan H. Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh, adding that it is “too early” to reach such a conclusion from recent experience.
“Maybe there’s something to it, but I think there’s less here than meets the eye,” Meltzer said.
For now, though, many economists remain amazed at an expansion that has reached a ripe old age without such telltale signs of wear as sagging productivity, inflamed prices and clogged inventories.
“Clearly, our ability to have extended expansions is much greater now than it ever has been,” said Joel L. Naroff, an economic consultant in Philadelphia. While few would argue that upturns last forever, he added, “That doesn’t mean we can’t get a couple more years out of this one.”
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Breaking the Cycle?
The near-record expansion of the 1990s has optimists declaring that the business cycle, which has produced 31 recessions since 1857, is changing for the better and that Americans will face fewer and milder downturns. Shaded areas are periods of economic contraction.
Note: NBER defines a recession as a recurring period of decline in total output, income, employment and trade, usually lasting at least six months. The average recession since 1857 has lasted 18 months, but the average duration since World War II has shortened to 11 months.
