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The Boom

Cover Story

The Boom


Time to celebrate. This month, the current economic expansion became the longest in U.S. history. The boom has done more than create millions of new jobholders and stock owners. It has also restored the public's confidence and given more people than ever a shot at the American Dream. We tell the story.CLINTON: WHY THE GOOD TIMES KEEP ON ROLLING

In an interview with BUSINESS WEEK, the President gives his view of what caused the boom and how to prolong it.WHY THE PRODUCTIVITY REVOLUTION WILL SPREAD

Information technology is reenergizing old-line industries, improving the efficiency of companies from Ford Motor to Ocean Spray Cranberries.THE RISK THAT BOOM WILL TURN TO BUST

A commentary by Economics Editor Michael J. Mandel explores the possibility that things will end badly.Return to top

Return to top

How Prosperity Is Reshaping the American Economy

Confidence is up, jobs are everywhere, and there's a new breed of entrepreneur

Leo Danushevsky arrived in New York City from Ukraine in 1979 with $900 and not much else. He worked as a machinist until 1989, when he borrowed $85,000 to start L.C. Mold Inc., a tool-and-die company in suburban Chicago. Last year, L.C. Mold did $5 million in sales. Danushevsky and his wife own $500,000 in stocks and just moved into a new home on 2 1/2 acres, complete with a spa. What's more, almost all of his 37 employees--most of them fellow immigrants--own their own homes and participate in a profit-sharing plan. "Everything I read about America turned out to be true," marvels Danushevsky. "If you work hard enough, you can get somewhere."

Danushevsky is the embodiment of the Roaring '90s. He's an entrepreneur. He's creating jobs. And the stock market has treated him very well. Multiply Danushevsky by millions and you see why the U.S. is celebrating the longest period of continuous growth in its history. At 107 months in February, this expansion surpasses the record set during the Vietnam War years of 1961-69. "I think people really feel that something has changed," President Clinton--one of many people eager to claim a share of the credit--said in a Feb. 1 interview with BUSINESS WEEK (page 108).

The expansion that began in March, 1991, has raised real gross domestic product by more than a third, minted 100,000 more people earning a million dollars a year, thrust the federal budget into a surprising surplus, and given jobs to people who were once outside the working world--welfare mothers, the handicapped, people who had been pushed into early retirement.GLOOM BEGONE. Best of all, it has transformed the psyche of millions of Americans. The pervasive gloom at the beginning of the 1990s is gone. No longer are Americans afraid that the Japanese will overwhelm them with superior technology or that they will saddle their children with government debt. "What this expansion has done is give the American public its self-confidence back," says Andrew Kohut, director of the Pew Research Center for the People & the Press.

After a near-decade of progress, other countries look at America with awe, envy, and, sometimes, fear. "In 1990, the concern was whether U.S. companies could compete in global markets," says Treasury Secretary Lawrence H. Summers. "Today, the concern is whether the U.S. is a hyperpower."

The record expansion shows few signs of flagging as it heads into uncharted territory. "There's no inherent biological clock ticking for the economy," says Nicholas S. Perna, founder of Perna Associates, a Ridgefield (Conn.) economic-consulting firm. Yes, a few economists worry that a crash in the high-flying stock market could set off a chain of events leading to serious economic trouble (page 120). But the prevailing wisdom is that the U.S. economy is stable--and poised for more years of healthy growth. One engine that should drive growth forward is the continued spread of productivity-enhancing technology everywhere from the Sun Belt to the Rust Belt (page 112).

What went right? In the 1990s, American businesses and workers broke out of a long, anguishing drop-off in productivity growth that began in 1973. Through the late 1980s and most of the '90s, companies went through wrenching downsizings. They invested in computer and communications technology that dramatically enhanced output per worker. Workers, meanwhile, upgraded their skills and seized control of their financial futures as new laws triggered a boom in 401(k) retirement plans.

Smart policy out of Washington did its part to spark and sustain the expansion. Political support for the economic Nanny State withered. President Reagan's tax cuts fired up America's entrepreneurial zeal. Two decades of deregulation unshackled airlines, trucking, telecommunications, and financial services. Spending caps passed by Congress under Presidents Bush and Clinton helped end chronic deficits.

Fiscal restraint allowed Federal Reserve Chairman Alan Greenspan to keep monetary policy relatively loose except for a well-timed series of rate increases to head off inflation in 1994 and '95. And when world financial markets were in danger of melting down in the autumn of 1998, Greenspan rode to the rescue with three rapid-fire rate cuts. Yet Greenspan's greatest contribution may have been what he didn't do: choke off growth when unemployment fell below 5 1/2.BLACK INK. Now, lavish tax revenue from the economic boom is making budget-balancing a breeze. Over the next decade, if spending outside of Social Security and Medicare is allowed to rise with inflation, the cumulative budget surplus could approach $1 trillion, or $3 trillion including Social Security tax revenue--a far cry from a few years ago, when experts were forecasting red ink ad infinitum. "The deficit was a symbol of our inability to deal with our problems," says former Treasury Secretary Robert E. Rubin.

Events beyond U.S. borders have contributed to the expansion as well. The end of the cold war allowed the U.S. to shift its emphasis from national security to economic growth. At the same time, countries in Europe and Asia began dropping barriers to trade, and that allowed U.S. companies to sell more goods and services overseas. Everything clicked at once. "What has materialized is a million-to-one shot," says Robert E. Litan, a vice-president at Brookings Institution.

Perhaps the most important forces behind the boom are intangible. The U.S. economy has a seemingly endless potential to absorb and support fledgling companies, newcomers to American shores, and innovative ideas. In dozens of interviews with economists, pollsters, politicians, and sociologists, what emerges is a picture of a society that is optimistic, even adventurous. Gail D. Fosler, chief economist at the Conference Board, compares it to the settling of the American West after the Civil War. "Folks went in pursuit of opportunity, without a clear focus of what it might be," she says. "It was built on belief."

Now as then, a stream of both high- and low-skilled immigrants has added to the prosperity. At a time when the U.S. labor market is the tightest in a generation, "immigration seems to be filling in exactly where there would be labor shortages," says Mark R. Rosenzweig, a professor of economics at the University of Pennsylvania. As of 1997, 21% of the chemical engineers in the U.S. were foreign-born, as were 20% of the computer scientists, says the National Science Foundation.

Mia Mendoza is one of those upwardly mobile newcomers. She came to the U.S. from Colombia in 1975 at age 20, jobless and penniless. She worked her way up from receptionist to talk-show host at a Tampa Bay (Fla.) television station, then directed sales development for Hispanic-TV company Telemundo Holdings Inc. In 1994, she and a girlfriend started Mendoza-Harmelin Inc., a Hispanic marketing and advertising firm. Today, the Bala Cynwyd (Pa.) outfit bills $2.7 million a year and counts among its clients First Union Bank, Aetna U.S. Health Care, and Vanguard. Sounding a lot like Danushevsky, Mendoza says: "I could only have done it in America."LATE BLOOMER. It's worth recalling that this expansion started out slowly. Even after the 1990-91 recession was over, job growth remained sluggish. Companies poured money into new investment but waited years before adding to their payrolls. The Pew Center's Kohut says many people thought the country was still in recession right up to 1995. Because of the drag of those early years, GDP growth in the 1990s as a whole was substantially less than in the 1960s and about even with the 1970s and '80s.

The second half of the 1990s was when growth really kicked in. High-tech investment finally began to pay off in the form of higher profits and productivity. Companies began hiring again, the stock market boomed, and newly confident American workers went on a spending spree that has so far shown no signs of abating.

Today, a tight-as-a-drum labor market--the U.S. unemployment rate is at a 30-year low --is giving workers a feeling that they're more in control. Yes, big companies are still laying off workers in droves to stay competitive. Witness Coca-Cola Co.'s announcement on Jan. 26 that it's slashing 6,000 jobs. But job cuts no longer prompt collective angst. Why should they? A study by the Federal Reserve Bank of Boston shows that workers who are laid off today are 80% more likely to get a job within a month than in 1992.

Things weren't easy for James Petillo, 57, in 1992, when he quit one job and failed to find another right away. He had worked in personnel for a succession of big companies. So he switched careers, and the growing economy has helped lift his fortunes. He works out of his Lake Bluff (Ill.) home in a less glamorous but better-paying job as regional manager at Super Products Corp., a Milwaukee supplier of truck-mounted industrial-vacuum equipment. His net worth has increased 150% in the expansion. Says Petillo: "I feel good in the morning."

Like Petillo, more executives are abandoning big companies. Some are being drawn to risky startups by the promise of stock options. "A lot of people aren't willing to climb through the ranks of traditional companies anymore," says Crichton W. Brown, managing director of New Orleans-based venture-capital firm Advantage Capital Partners."SEA CHANGE." A study of 500 Internet companies by executive-search firm SpencerStuart found that 88% of the executives they hired in the fourth quarter of 1999 came from traditional companies. A year earlier, the figure was just 38%. "There has been a sea change in our view about jobs," says Richard T. Curtin, who surveys consumer attitudes for the University of Michigan. "In the early '90s, we were apprehensive and saw threats on many fronts. Now, we feel quite secure in our job prospects." More people are going back to school, too. Since 1989, the number of college enrollees aged 35 and over has risen by over 25%.

One sign of the new mood is the explosion of the venture-capital market. Venture capitalists sank $45 billion into fledgling companies last year, compared with $3.7 billion in 1990, according to Venture Economics in Newark, N.J.

Venture cash is transforming half-formed ideas into world-beating products and services. Back in the 1980s, even though Tyrone F. Pike had worked for a venture-capital firm, he had to use his own savings to start his first company, LAN Systems Inc. In the 1990s, the money came to him. Three venture-capital funds hired him to nurse back to health sickly Citrix Systems Inc., which builds applications servers. Today, Citrix has a $13 billion market value. Pike's latest startup is Inc., which offers on-demand virtual private networks over the Internet. "There's a fiercely independent spirit that exists in America," says Pike. "We're not attuned to the fact that we might not succeed. We dive in headlong."

Women and the young are among the divers. The number of female-owned businesses grew by 42% from 1992 to 1999, according to the National Foundation for Women Business Owners. Employment by such businesses grew 102% in the same period. "The rise in women entrepreneurs is one of the big demographic changes in our society," says Lynn Neeley, president of the United States Association for Small Business & Entrepreneurship. As for the young, the National Association for the Self-Employed says that only 1% to 2% of graduating MBAs in the 1980s wanted to start as entrepreneurs. Now, at various schools, 10% to 20% do.

What they really want is to become millionaires. So does everyone, it seems. The Fed's most recent consumer-finance survey shows that market mania is infecting America like the flu. Stocks accounted for 54% of household financial assets in 1998, up from 28% in 1989. Some 40 million new investors have poured into the market since 1991. By 1998, 80 million Americans--or close to 50% of U.S. households--owned stocks, either directly or in a mutual or pension fund.

Companies with no more than a business plan have raised unseemly amounts of cash just by offering shares to the public. Since the expansion began, more than 5,000 companies have come to the stock market to raise more than $300 billion. "We're the only country in the world where you can raise your first $100 million before you buy your first suit," says Summers.PLAYERS. The technology-heavy Nasdaq Composite Index has skyrocketed, from under 500 in March, 1991, to just under 4,000 by this month. In the same period, even the staid Dow Jones industrial average has zoomed 300%. Today, supermarket tabloids are as likely to write about Microsoft Corp. Chairman William H. Gates III as they are the latest supermodel. Retiree Rose Kapranos, a 76-year-old former administrative assistant in a suburb of Portland, Ore., reads three newspapers a day, about four financial magazines a month, and is active in a local investment club. They help her keep a watchful eye on her and husband Bill's stock portfolio, which is now worth about $600,000. The couple lives on a fixed income of about $4,000 a month, but thanks to their investments, they have the funds to travel all over the world.

Stock ownership has blossomed as interest rates have declined and corporate profits have risen. But other factors have played a role, too. Many companies shifted their employee pension plans from defined-benefit plans to self-directed, defined-contribution ones, which gave individuals a huge cache of money looking for a place to grow. Baby boomers began searching for ways to make their sunset years more financially secure, and they poured money into equity mutual funds. Then the tech-savvy younger set piled in. Today, 21% of Gen Xers--those between the ages of 19 and 35--own stocks.

The 1990s also saw democracy come to Wall Street. Under Chairman Arthur Levitt Jr., the Securities & Exchange Commission cracked down on abuses by stockbrokers and market-makers. The Internet and other technologies brought such new services as low-commission online brokers and do-it-yourself online research and portfolio management. Then came electronic trading systems that cut out expensive middlemen. That encouraged small investors to jump in and lowered the cost of raising capital.

Equally important in lubricating commerce has been the rise of financial engineering--chopping up and recombining plain-vanilla securities to meet the specialized needs of investors and borrowers. By last summer, the face value of over-the-counter derivatives, such as interest-rate swaps, had reached $92 trillion worldwide, up from $25 trillion at the end of 1992, according to newsletter Swaps Monitor.

But more than anything else, it's the rise of information technology and the Internet that has supercharged the economy. The Net's birth as a commercial enterprise was in March, 1991--the same month that the current economic expansion began. Coincidence? Of course. But over the past couple of years, the two have become inextricably linked. Former Labor Secretary Robert B. Reich believes that 70% of the credit for the expansion belongs to computers and the Internet. "The huge investments in information technology have finally begun to pay off," he says. "Everything else pales in comparison."

The spadework for the technology-led boom took place long before the National Science Foundation privatized what had been a digital sandbox for academics. Business purchases of information technology have been rising by 25% a year since the 1970s. Massachusetts Institute of Technology economist Erik Brynjolfsson says that hard-to-quantify innovations in the way companies do business are actually far more valuable than the hardware and software they've purchased. "More than $1 trillion in those intangibles has been built up over the past 10 years," Brynjolfsson maintains."SAFETY VALVE." Electronic commerce--a spawn of the Internet--allows companies to reduce the amount of money they spend on processing an order from $75 to $10 on average, says David Pecaut, co-head of global electronic commerce at Boston Consulting Group. Competition and price transparency will increase as e-commerce spreads, putting downward pressure on profit margins and forcing companies to become more efficient. "This is a safety valve on inflation," Pecaut says. Diane C. Swonk, chief economist at Bank One Corp. in Chicago, predicts that aggressive capital spending, especially by large companies, "will help keep productivity growth on the rise."

There certainly will be plenty of gear for companies to buy. The Next Big Thing--broadband technology, or "fatter pipes" that allow swifter Internet downloads--seems well on its way to taking the Internet to a new level of power and convenience. Says William L. Schrader, chief executive of PSINet Inc. of Herndon, Va., which carries Internet traffic: "We're in Day One of the Internet Age."

The U.S. economy is so vibrant that even a big tumble in the stock market might not be enough to knock it off-kilter. Sure, worried consumers might retrench. But with the economy growing at an annual rate of nearly 6% in the last quarter of 1999, any slowdown in consumption would simply do some of the Federal Reserve's work by putting the economy on a safer, slower path of growth. "I could easily see this economy growing right through a stock market decline of 1987 proportions," says Alan Blinder, professor of economics at Princeton University and a former Fed vice-chairman.

The economic growth of the 1990s has lifted many boats. The number of Americans living in poverty has dropped dramatically, from 10.5% in 1991 to 8.5% in 1998, according to the Census Bureau. The unemployment rate among blacks has fallen across the board: from almost 12% to 7% for women, from almost 14% to 7% for men, and from 36% to 28% for teenagers. A record 66.8% of American households own their own homes today, up from 64.1% in 1991. And minority homeownership is booming as well. Among Hispanics, the number is 45.5%, up from 39% in 1991. And among African Americans, it's now 46.7%, up from 42.7%.THE LION'S SHARE. Of course, not everyone is celebrating. Some 44 million Americans lack health insurance. An influx of low-priced imports from developing countries has wiped out thousands of American jobs in the steel, textile, and other industries. And a ballooning trade deficit is a constant reminder that the U.S. is a net debtor nation, importing far more than it exports. The current account deficit, which measures trade in goods and services as well as investment income, rose to about 3.4% of gross domestic product last year--the level at which economists start to fret that the dollar could tumble. While foreigners are happy to extend credit to the U.S. now, they may change their minds some day and demand repayment of those mega-IOUs. Still, the trade deficit hasn't yet exceeded the record-high percentage of GDP it reached in 1986 and 1987.

Another festering problem is income inequality. Yes, median household income, at $39,308 in 1998, has risen 10% during the expansion. But that still leaves most incomes barely above pre-recession levels. And the gap between poor and rich is huge: The bottom fifth of U.S. households receives less than 4% of the national income, while the top fifth takes home almost half of it. "The expansion has been very good for capital, but not for workers," says Edward N. Wolff, a New York University economics professor. On the other hand, the gap between rich and poor has not widened since 1995. And the Fed's recent consumer-finance survey implies that even the poorest Americans are moving up: The proportion of families with incomes below $10,000 fell by one-sixth, to 12.6%, from 1995 to 1998.

Consumer debt is another concern. Nonbusiness bankruptcy filings soared 60% from 1991 to 1998, and the amount of borrowing on margin has doubled since 1996. If the economy suddenly slows and income growth tapers off, consumers could be severely squeezed. But even the debt overhang could be overblown. Incomes have risen along with debts, so debt-service payments aren't growing as a percentage of disposable income. And if a study commissioned by the Consumer Federation of America is right, consumer bankruptcies are on the wane. They dropped 9.4% in last year's fourth quarter from the same period in 1998, for the largest one-year decline on record, according to research by University of Maryland economist Lawrence M. Ausubel.

Adding it all up, the U.S. is in a far better place as it starts the new millennium than it was when the current economic expansion began 107 months ago. The economy is more productive and more resilient, and so are the American people. The country will never be the same.By Rich Miller, Laura Cohn, Howard Gleckman, and Paula Dwyer in Washington, with Ann Therese Palmer in ChicagoReturn to top

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