Commentary: Cracking This Crazy Economy
It's a puzzlement. U.S. companies announced a record 678,000 job cuts in 1998, but the unemployment rate dropped to 4.3% in December, a 28-year low. Wages are rising rapidly, but price inflation seems tame. Profits are stagnant, but the stock market hit new records in January. And even while Brazil teeters on the brink, Britain and Germany slump, and Japan is stuck in a deep depression, the U.S. economy keeps growing.
What to make of all these conflicting signals? BUSINESS WEEK Economics Editor Michael Mandel explains what these contradictions mean for the U.S. economy in 1999.
With most manufacturers continuing to struggle, what keeps driving the U.S. economy?
It's the New Economy, plain and simple. In the face of a global slowdown, the information sector in the U.S. has soared. Indeed, in recent months, the health of the U.S. economy has become increasingly dependent on cutting-edge industries.
For example, the information industries, broadly defined, have for the first time become the biggest job creators in the economy. Over the past year, more than 37% of new jobs have come from information-related service industries, such as communications, education, software, consulting, and financial services (chart). By comparison, these industries generated only 15% of jobs just three years ago.
High tech is also keeping U.S. factories afloat. Manufacturing production in the U.S. has risen by 2% over the past year--but without computers, semiconductors, and communications equipment, it would have fallen by 0.4%. And while consumers have been buying new automobiles and homes at a breakneck pace, demand for high-tech products and services such as computers and home-phone service has also been soaring.
Last but not least, the high-tech boom is helping sustain the stock market as well. While old-line industrial companies such as Caterpillar, International Paper, and Procter & Gamble languish, big gains are coming from Intel, Microsoft, and Yahoo!
Sure, the high-tech boom may have lifted the U.S. economy in 1998. But everyone agrees that there is going to be a slowdown this year, don't they?
Most forecasters have been expecting around 2% growth in 1999. This gives them the virtue of consistency, since this was the consensus forecast for 1996, 1997, and 1998. But in each of these years, actual growth exceeded 3.5%.
The same pattern seems to be happening again. Many forecasters are already raising estimates for 1999. For instance, Richard Berner, chief economist at Mellon Bank in Pittsburgh, just boosted his 1999 projections from 2.2% to 2.75%. The main problem is that the forecasters have typically underestimated both consumer spending and capital investment. Companies keep spending on new equipment, says Berner, "because capital is cheap and labor is expensive."
In particular, info-tech spending in 1999 could once more be strong. Intel recorded a 17% revenue gain in the fourth quarter of 1998, beating expectations. And global semiconductor sales jumped by almost 5% in November compared with October, the biggest monthly gain since 1990.
Moreover, workers in the information industries earn relatively high wages. So as long as the growth in these industries continues, Americans will have enough money to keep spending.
But the bad news from overseas seems to never stop coming. Can the U.S. keep growing even if the global economy slows?
The answer is yes--with caveats. The U.S. credit markets clearly are vulnerable to overseas shocks, as the events of last fall showed. And a sustained stock market downturn could hit consumer spending hard. Indeed, consumer spending is more sensitive to market fluctuations than before, since "the level of wealth relative to the economy has soared," says Chris Varvares, president of Macroeconomic Advisors, an economic-forecasting firm.
The immediate danger, of course, is Brazil, which devalued on Jan. 13, but that country is not the only potential trouble spot. Standard & Poor's DRI is now projecting that Japan's gross domestic product could shrink by as much as 3% in 1999. In Britain, manufacturing production is down by 0.2% over the last year. Meanwhile, new industrial orders are plummeting in Germany, and economists are talking about a manufacturing recession. "Manufacturing is being hit by the Asia crisis," says Gerhard Grebe, a Frankfurt-based economist for Bank Julius Baer.
But all of these problems are manageable--as long as they do not snowball into a global financial crisis. In 1998, quick reactions by the Fed and other central banks, combined with international financial aid to troubled countries, helped calm the markets. Similar actions could be needed again this year.
Reports of layoffs and weak corporate earnings keep rolling in. Aren't they a sign that something is wrong?
In part, both the job cuts and the profits shortfall are a reaction to the global slowdown. Indeed, some government statistics suggest that the earnings decline over the last year is almost completely due to a fall in overseas profits.
Domestically, corporations are facing stagnant prices, combined with wages rising at a 3.8% clip. In this environment, the only way to achieve higher profits is to boost productivity--which means job cuts and investment in new technology.
Will they succeed? That may be the biggest question of 1999. Rising productivity will keep profits growing, boost the stock market, and fuel consumer spending--but if productivity stagnates, the economy will be hard-pressed to maintain its current momentum.
How long can this expansion last?
As of December, the U.S. passed the record for the longest peacetime expansion, with the historical data stretching back to the 1850s. The only one longer was the 1960s, which was goosed by Vietnam War spending. Barring an unlikely unraveling this year, the U.S. will cross that milestone on Jan. 1, 2000--a propitious date indeed.