- January 01, 2000, Robert W. Marsh, Contributing Editor
"Anything that cannot go on forever will stop." So said the late Herbert Stein, chairman of president Richard Nixon's Council of Economic Advisors. It is also one of the favorite expressions of Robert Fry, DuPont's senior associate economist. According to Fry, it pertains especially to the present state of the US economy.
"The current expansion," says Fry, "is the longest in US history. In the last 17 years, we have been in a recession for only eight months. To have growth go on for this long and be this strong so late in the period -- without a significant rise in inflation -- is unprecedented."
The Big Mo
So how much longer will it continue? At least well into this year, Fry believes. "In terms of annual growth, we have enough momentum from 1999 to carry us through this year, and then we'll see what 2001 holds."
At the same time, he sees signs that the economy is slowing down, but he doesn't expect it to fall into recession and points to annual gross domestic product (GDP) growth over the past three years: 1997, 4.5%; 1998, 4.3%; 1999, 3.8%. Growth in Y2K should be about 2.8%.
"I think 2000 may be the flip side of 1998," notes Fry. "We had very strong GDP growth that year even though the manufacturing sector was stagnant. Manufacturers had to contend with weak export demand primarily due to the Asian currency crisis and economic problems in other parts of the world. Now, the rest of the world is picking up, but US demand is slowing down. Last summer, it looked like the rest of the world was accelerating faster than the US was slowing, which probably was not a good thing. We might have had some inflation problems if everyone got strong at once. Now, we're starting to see some slowing in some of the US leading indicators, such as housing. Home sales and housing starts peaked last summer, and mortgage applications went way down. We'll probably see the effect on the overall economy this spring."
Another negative influence on the US economy was net exports, Fry reports. "That sector was a big negative for GDP. It may start to turn around this year because we're seeing better growth in Europe and Asia, which should help lift exports and help the manufacturing sector."
Fry continues, "The US economic engine is not pulling the world's economic train by itself anymore. It is getting some help from Asia, especially Korea, and Western Europe. Canada, which may not be big enough to be called an engine, grew faster than the US in the middle two quarters of 1999. So, with Canada and Western Europe kicking their economies into a higher gear and Japan kicking theirs out of reverse, we're starting to get some help."
A Different Kind of Y2K Bug
In the meantime, Fry has spotted a Y2K bug, although not the one that has been getting all the publicity. This one is causing some confusion in the GDP numbers. "Companies built up their inventories in the fourth quarter of last year because they were afraid that the Y2K computer bug would cause problems. In a sense it did. It made that quarter artificially strong. So, the numbers for the first quarter of this year will be artificially weak."
Everyone who drives a car or buys fuel oil knows petroleum prices have risen. "In fact," says Fry, "they've nearly doubled since December of 1998. Crude oil was down to about $11 per barrel and now it is selling [in the] low 20s. That's like a tax on the American consumer. It's money you can't spend on other things. The price of crude might come down a few dollars this spring and finally settle in the 18- to 20-dollar range.
Other negative influences on the US economy include the Fed's raising of interest rates. Yet, according to Fry, the purchasing managers index showed the Fed needed to raise rates. "The supplier delivery index indicated that vendors are slowing down in terms of delivering the goods. That means supply was having a hard time keeping up with demand, which usually causes inflation to go up and the Fed to raise interest rates."
In spite of the negatives, Fry sees enough positives to maintain healthy -- if only 2.8 percent -- growth in GDP this year. For one thing, he cites "a bullish bias in the stock market. It goes down when the news is bad and then comes back up again. It doesn't really take good news to make it go up, just the absence of bad news.
"Basically, from 1997 until mid '99," Fry explains, "the US consumer kept the world economy out of recession. Not in every country, of course, but we kept the whole world from going under. Now, we're starting to get a little help. East Asia is growing rapidly again. So is Korea. Japan -- going two steps forward and one step back -- is not growing as fast, but its economy is still much better than it has been. Europe picked up about mid-year in 1999, and its prospects for this year look good."
He continues, "Even though we have tight markets, which normally would indicate inflation should be rising, aside from energy, it hasn't happened yet. To end the economic expansion, inflation has to be high enough to cause the Fed to slam on the brakes. Last year's raises in interest rates have not been enough to push the economy over the edge. So, low inflation is a positive, the rest of the world is a positive, consumer confidence is still good, and even if the stock market isn't setting any records, most people bought their stock when it was lower than it is now, and if they sell, they'll have capital gains.
"To bring this economy to its knees, you've got to hit it between the eyes with a two-by-four. The interest rates we've seen so far won't do it."
The Internet Economy
The Internet, according to Robert Fry, moves us closer to the economist's model of perfect competition where people have perfect information. Buyers know what the low price is. That puts downward pressure on prices, which, in turn, holds down the measured inflation rate. Even with an inflationary monetary policy, the inflation rate will be suppressed because of the micro-economic pressures from the Internet.
"More and more purchasing agents are turning to the Internet to check prices," says Fry. "I heard of a retailer who spent a lot of time with vendors who sold goods that provided a very small percentage of their profits. The purchasing agent decided he wouldn't spend that time anymore. He told them to post their prices on the Internet, and he would order what he needed. This purchasing technique will help control prices, but it will reduce the number of sales reps needed."
Fry adds, "I think the wholesale sector of the economy has been a dinosaur for a while, and I'm not sure how much of the retail sector we need anymore.
"In terms of annual numbers, we are going to carry some momentum from 1999 into 2000, and it's going to be a pretty good year. Then, we'll see what 2001 holds. It may not be quite as good but...we don't have the kinds of really serious imbalances that tend to bring on a recession."
But remember: Anything that cannot go on forever will stop.