Nearing a decade of growth
The year 2000 looks like another good year for the U.S. economy, and barring a crisis, should result in a ninth straight year of growth
By Daryl Delano -- Industrial Distribution, 1/1/2000
There's little doubt in the minds of economic forecasters that growth in the U.S. economy will continue right through the first year of the 21st century. Come next spring, this economic expansion, which began early in the spring of 1991, will become the longest period of sustained growth in the nation's history.It won't be all sunshine and roses next year; there are some gathering clouds on the economic horizon, and we'll no longer enjoy the tailwind provided by weak global commodity prices and surplus productive capacity. But as we start the first few days of this new Millennium, the economy appears to have enough momentum to carry it through just about any combination of obstacles that might be put in its path. Of course, as in any year, a single mega-crisis involving war, pestilence, an oil embargo, etc., could throw the stars out of alignment.
Overall U.S. economic growth didn't slow nearly as much during 1999 as most economic forecasters -- including Federal Reserve Board monetary policy-makers -- had anticipated. The unexpected strength and resilience of the U.S. economy provided the justification for the Fed's move to increase short-term interest rates during the summer, and again on Nov. 16 -- the third rate hike of the year.
In 1999, things got off to a great start, and as we moved through the second and third quarters of 1999, the economic environment seemed just as conducive to further growth as it had been for the past several years. In fact, virtually every significant economic indicator suggested that the U.S. economy was continuing to enjoy its most robust health in three decades.
The U.S. economy appeared to cool off during the second quarter of 1999 as the Commerce Department reported that GDP expanded at just a 1.6 percent annualized rate. This was quite a come-down from the 4.7 percent growth that the economy averaged over the previous three quarters, and in fact the slowest rate of growth recorded over the past four years. However, a closer look below the surface of the GDP report for the second quarter revealed that there was much less of a backtracking here than met the eye, and that makes us confident this does not mark the beginning of sustained slow growth for the U.S. economy.
The national mood remained upbeat as we entered the final months of 1999, with consumer confidence almost as high then as it was a year earlier. The Federal Reserve Board periodically surveys economic conditions around the nation and summarizes its findings in the "Beige Book" -- a report intended to help Fed monetary policy makers get at least a subjective sense of the overall strength of the U.S. economy.
If the economy is seen to be "overheating," or if inflation seems to be getting a foothold, the movers and shakers at the Fed can point to the Beige Book report as justification for their (usually unpopular) policy moves to raise interest rates. Or if the economy appears to be in danger of falling into recession, they can justify interest rate decreases even in the face of stable demand and above-trend inflation.
The Beige Book released in late September 1999 showed an economy that was neither too hot nor too cold -- a continuation of what many have described during the past few years as being a benign "Goldilocks economy." The Fed reported that all regional economies continued to exhibit overall strength in the early fall, with most parts of the country experiencing moderate-to-brisk rates of growth. Consumer spending and vehicle sales were robust in the period under review by the Fed (the late summer and early fall).
In addition, manufacturing sector activity was seen to be on the rise in most parts of the country, with orders and production up -- much of the increase attributable to resurgent Asian demand. Inflation was a bit more of a concern, though, as the Fed noted that although consumer prices were increasing only slightly, many regions had begun reporting significant increases in some materials prices. And home sales and construction activity, while still strong, were said to be showing some signs of an impending slowdown.
On balance, this was a very positive assessment of economic conditions, with even the signs of incipient inflation and slowdown probably taking just enough of an edge off the strong U.S. economy to keep the Fed from moving too far or too fast on interest rate hikes.
Nevertheless, as we moved into the final days of the 20th century, there were signs that the U.S. economy had developed three imbalances that would likely lead to slower growth during the year 2000. These imbalances involve: a lackluster (and, recently, negative) personal savings rate; a ballooning U.S. trade deficit; and, a "bubble" in asset values (stocks, bonds, real estate). All of these factors have actually been positive trends for the U.S. economy in the short-run -- but will prove to be troublesome and potentially dangerous negatives over the medium- and long-term.
These imbalances cannot persist indefinitely and may eventually threaten the current long economic expansion -- but only if economic policy makers are asleep at the switch. That is an unlikely scenario given the skill and success of the Greenspan/Rubin (now Summers) economic teams at the Fed and Treasury Department. As long as consumers keep spending and businesses keep investing, this long economic expansion will be able to maintain a significant amount of momentum.
There's no reason yet to believe that the U.S. economy is going to break down or run out of gas. Yes, there are a lot of miles on this expansion, but U.S. businesses have made the necessary investments over the past several years to keep it humming. While the U.S. economy may not exactly be "purring like a kitten" during the next few years, we're not yet running on fumes or rolling on bald tires. There'll be bumps in the road, to be sure, but the next recession is still well down the road and over at least a few more hills.
Economy slows in November
The three interest rate hikes engineered by the Federal Reserve in 1999 may be starting to have the intended result of slowing the economy. Reports on manufacturing and construction spending released on Dec. 1 showed moderating growth. According to the National Assn. of Purchasing Management, economic activity in the manufacturing sector grew for the 10th straight month in November, but at a slightly slower rate than in October.
NAPM's composite index for the manufacturing sector came in at 56.2, down from 56.6 in October. A reading of about 50 indicates economic expansion. Lower readings above 50 signal that growth is slowing. Economists had expected the index to remain unchanged in November.
"The overall picture is one of continuing growth, though at a slightly decelerating rate, in manufacturing activity during the month of November," said Norbert J. Ore, who runs NAPM's survey.
Production increased during the month, though also at a slower pace than in October. The production index fell to 57.4 from 58.3. Prices continued to rise, although the advance has slowed, with the prices-paid index falling sharply to 65.3 from 69.4.
The Fed has moved short-term interest rates 1.5 percentage points higher since June in an effort to slow a robust economy and forestall inflation. Economists are divided on whether further central-bank action is needed, for while signs of inflation are minimal, some areas of the economy are motoring ahead.
In another report, construction spending rose slightly in October. While construction rose 0.3 percent to a seasonally adjusted annual rate of $699.3 billion, September's figures were revised lower. The Commerce Department now says that spending fell 0.1 percent in September, after initially estimating that spending rose 0.5 percent.
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