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Not Such a Hot Party After All

The numbers folks at WorldCom Inc. et al aren't the only ones busy restating the rosy figures they previously released to the public. At the end of July, the government will issue its annual "benchmark" revision of the nation's basic economic output data for the prior three years, and according to Morgan Stanley economist Stephen S. Roach, it's likely to be a humdinger.

When the crew with the green eyeshades in Washington performed the same exercise last year, they cut the economy's average yearly growth rate for 1998 through 2000 by nearly a third of a percentage point and 2000's rise by nine-tenths of a percentage point. But that still left the three-year annual pace at a healthy 4.2%.

This time around, however, the result may be far less reassuring, says Roach. Based on recently released data revisions, he expects downward adjustments in such areas as capital spending, the trade balance in services (which includes tourism, education, and financial and professional services), and personal income. All of these changes could have a significant impact on estimates of economic growth.

The rise in shipments of nondefense capital goods in 2000, for example, is now pegged at only 5%, just half of the previous estimate of 10%. America's surplus in services trade last year was recently lowered by more than 12%, or $10 billion. And revised data on wages and salaries paid to workers in the private sector in 2000 suggest that the total could be cut by at least $100 billion, enough to slice more than a percentage point from the growth rate of personal income.

Growth rates of America's gross domestic product are now estimated at 4.1% for both 1999 and 2000 and 1.2% for 2001. Based on rough, back-of-the- envelope calculations, Roach thinks the growth rate may be lowered significantly for the last three years--and possibly by as much as a full percentage point for 2000.

Such prospective revisions have some worrisome implications. With less household income, America's record-low personal savings rate in recent years could look even more anemic. A larger trade deficit would imply that America's dependence on foreign capital has been greater than previously thought. And less economic growth translates into smaller productivity gains, further tarnishing some of the New Economy's luster.

Roach is known on Wall Street and in economic circles as a longtime skeptic of the New Economy, so it's possible that he may be reading too much gloom into the statistical tea leaves. Many of his past criticisms of the recent boom's excesses, however, have turned out to be painfully accurate. For their part, Washington's statisticians will have their say on July 31. Stay tuned. With rapidly aging populations, many nations face unprecedented financial pressures from generous social-security systems. A common theory is that this problem is a by-product of the historic shift toward democratic governments whose elderly citizens are able to use their voting power to extract high pension benefits from legislators.

Not so, report economists Casey B. Mulligan and Ricard Gil of the University of Chicago and Xavier Sala-i-Martin of Columbia University. In a study using data from 90 nations, they found that social-security policy is indeed affected by economic and demographic factors and that wealthier countries and those with older populations tend to spend more on public pension programs. However, the nature of political systems per se appears to have little impact on social-security planning or growth.

Among nations where regimes have changed, for example, Greece spent far less on public pensions when it was ruled by a military dictatorship than under democratic rule. But the reverse was true of Chile under General Augusto Pinochet, who boosted such spending substantially.

In short, the authors find no evidence that democracy fosters bloated social security budgets. Indeed, their research suggests that democracies actually tend to spend a little less of their gross domestic product on social security than nondemocracies and to "grow their budgets a bit more slowly." Stock market investors were heartened by the news that some 60% of the companies comprising the Standard & Poor's 500-stock index reported first-quarter earnings exceeding Wall Street estimates. But economist James Paulsen of Wells Capital Management points out that nearly 58% of the same group of companies also reported year-over-year sales declines (chart).

The problem for the stock market and the economy, he notes, is not so much earnings as revenues. While it's true that earnings have probably bottomed out, companies can't bolster their bottom lines indefinitely by cutting costs in the face of falling sales. Moreover, such tactics, which include layoffs, deferred hiring, and restraints on capital investment and advertising outlays, tend to weaken underlying growth in demand, creating a vicious circle.

Paulsen sees a "radical disconnect" between Wall Street projections of double-digit profit growth in the years ahead and the 10%-plus year-over-year decline in revenues reported by industrial companies in the S&P-500 last quarter. To fuel a solid revival in pro-

fits and economic growth, he says, policy officials in Washington need to find a way to stimulate final demand more aggressively. That's one reason why he believes the Federal Reserve is just as likely to cut interest rates this year as to raise them.

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