Boom or gloom? Economists take sides
By Agatha Ciancarelli -- Purchasing, 9/1/1998
Economic forecasts for the coming year range everywhere from fear of strong growth with inflation to sharp economic slowdown. Recent events appear to support both extremes. While some businesses are booming, others are experiencing layoffs and factory shutdowns.Lawrence Chimerine, senior vice president and chief economist, Economic Strategy Institute, in Washington, D.C., says, "It is clear that [the economy] is becoming more uneven. The capital goods sector and commodities industries--which have been affected by global overcapacity because of Asia--are both suffering." Most economists agree that this dual personality will persist for a number of months. However, there is plenty of disagreement as to which character will eventually prevail.
Tipping scales
Early in 1998, economists spoke of balance. They hoped such factors as the Asian crisis would offset the exuberance of the U.S. economy, leaving it in a state of steady, moderate growth. In his recent Humphrey Hawkins testimony to Congress, Federal Reserve chairman Alan Greenspan left the door open to such an outcome. "The Federal Open Market Committee believes that the conditions for continued growth with low inflation are in place here in the United States." A bit later, however, he said: "While we expect that the situation will develop rather smoothly, the Committee believes that, given the current tightness in labor markets, the potential for accelerating inflation is probably greater than the risk of protracted, excessive weakness in the economy."
A recent poll of economists by Purchasing Magazine finds economists lining up at both extremes with a few populating the middle ground.
On one hand, the trouble in Asia, recession in Japan, a deteriorating trade balance, plus aftershocks from the GM strike have some wondering just how low the rate of economic growth will fall. A. Gary Shilling, president of A. Gary Shilling & Co. investment advisers in Springfield, N.J., thinks the scales are likely to tip away from the strong growth-inflation scenario. "The Asian crisis," he says, "will have a distinctly negative effect on the U.S. economy. A squeeze on profits due to fewer exports could be detrimental to stocks and, subsequently, there would be lower consumer confidence and spending."
On the other hand, Diane Swonk, deputy chief economist of First Chicago NBD Corporation in Chicago, maintains that the expansion will remain relatively robust and that the U.S. economy risks overheating rather than slowing. For Swonk, inflation numbers in the Midwest are a leading indicator for the nation. "The tight labor market and acceleration in wages are causing inflation to re-accelerate," she says. Still, a response from the Federal Reserve is not likely before spring of 1999, Swonk says. "Wage-push inflation, as opposed to production-bottleneck inflation, is the slowest kind of inflation. It happens very gradually, seeping in on the sides, which means the Federal Reserve's response will happen very gradually."
Taking a more moderate line, Michael Niemira, vice president and senior economist at Bank of Tokyo-Mitsubishi in New York offers this observation: "When you go from a boom to a more moderate growth in the economy, there will unquestionably be a deceleration in a lot of industry activity which may be associated with additional layoffs. We have had a period of really 'boom' activity and now we are kind of settling back."
Wild card is Asia
Economists agree that the Asian crisis remains the leading risk factor for the U.S. economy because its full effects are still unknown. Says Swonk: "The U.S. economy is well positioned to absorb the shock from Asia. If we didn't have Asia going, we would already have an inflation problem." Chimerine emphasizes that trade is only a small part of the U.S. economy, particularly trade with Asia. "[Trade] is not enough to bring all the economy down. The overall economy will continue to grow modestly at a 2.5% rate over the next year, even with Asia," he predicts.
But while few are tremendously worried about trade, most say they will be watching the numbers very closely in coming months. Recent data show a rapid deterioration in the U.S. trade deficit, believed to be a direct result of the crisis in Asia. The problem has mostly shown up as a slowdown in exports. However, some note that a deterioration in trade can also be a sign of a strong U.S. economy. Notes Swonk, "The U.S. economy is buying a lot of imports because they are buying a lot of everything."
Chimerine says he will also be watching retail sales and housing for early indications of changes in U.S. consumer spending.
Inventories--which mushroomed in the first quarter--pose little cause for concern as most analysts polled by Purchasing credit the first-quarter swell to robust growth in consumption. Joel Naroff, chief bank economist for First Union in Philadelphia, says, "Businesses were really laying in the supplies to meet demand. It was not excessive if one looks at the rate of growth in consumer demand." Niemira agrees: "The first-quarter inventory build was a rational response to the pickup in final sales." What is more, the economists say second-quarter data reflects a sharp correction in inventories, assisted by the GM strike. In fact, some say the auto industry is now experiencing a shortage of inventory. "There is no longer a major inventory imbalance. It has been mostly worked out in the second quarter," says Chimerine.
Labor, most agree, presents the greatest upside risk to the economy. The analysts say unemployment is likely to remain below 5% for the next six to twelve months, and wage inflation will continue to accelerate. Swonk expects the unemployment rate to dip below 4%. Chimerine thinks wage growth will accelerate, but "nothing that is inflationary." Niemira suggests that, "We will continue to see a tight labor market in the next six months, but there will be an easing in the latter part of the year."
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