May 1, 1999
Economy's Growth Keeps to Fast Pace, Up 4.5% in Quarter
By SYLVIA NASAR
merica's economic boom -- already the second-longest on record -- shows no signs of flagging.
Despite a decline in auto production and another sharp deterioration in the nation's trade balance, the U.S. economy grew at a surprisingly robust 4.5 percent annual rate during the first quarter of 1999, the government reported Friday.
That is the sort of heady pace usually associated with the first, not the ninth, year of an economic expansion. Moreover, most forecasters, including those at the Federal Reserve, had been expecting a visible slowdown from the previous quarter's frenetic 6 percent rate.
"This economy continues to defy the aging process," said Bill Cheney, chief economist at John Hancock Mutual Life Insurance Co. in Boston. "The only discernible weakness is the trade deficit. And this has merely slowed the economy from warp speed."
To William Dudley, chief economist at Goldman, Sachs, the latest report on America's gross domestic product "in some ways was even stronger than the fourth quarter's."
It was too strong for some. Investors in the financial markets, who had been basking in an earlier report showing that wage pressures had eased, were stunned by the economy's momentum. Fears that the Fed might raise interest rates to cool things off sent bond prices down sharply. The stock market headed south as well. The Dow Jones industrial average dropped 89.34 points to close at 10,789.04.
A burst of domestic spending fueled last quarter's gains. Consumers, who account for more than two-thirds of the nation's buying, spent at the fastest pace in more than a decade. Home purchases shot up at an annual rate above 15 percent. And business investment in new plant and equipment, which had faltered last summer, continued to rebound, advancing at a 7.6 percent rate. Even state and local governments, flush with cash these days, helped fuel the boom by plowing their surpluses into road repairs and highway construction.
All figures in the Commerce Department report are adjusted to account for inflation and predictable seasonal variations.
Despite the virtual absence of inflation now, Dudley said, growth this fast always increases the risk that wages and prices will start to creep steadily upward.
But even though the so-called GDP deflator -- which measures changes in the prices of domestically produced goods -- jumped to a 1.4 percent annual rate compared with eight-tenths of a percent in the fourth quarter, the increase appeared mostly to reflect a one-time pay increase for civil servants.
Steven Landefeld, director of the Bureau of Economic Analysis, pointed out that prices on everything that businesses and consumers actually buy, including cut-price imports, rose no faster last quarter than in the fall, at a 1.1 percent rate.
How long can the good times last? An economist who has spent the last 15 years studying American business cycles from the time before the Civil War to the present says the short answer is: Pretty much as long as the Federal Reserve, committed to preventing another outbreak of inflation, remains convinced that the danger is minimal.
Long periods of uninterrupted growth, explains Christina Romer at the University of California at Berkeley in a forthcoming article in The Journal of Economic Perspectives, are a post-World War II phenomenon. Between the early 19th century and the 1960s, the longest interval between recessions was half a dozen years or fewer. But the 1960s boom lasted nearly nine years, the 1980s growth cycle stretched for almost eight years, and the expansion of the 1990s has now passed its eighth birthday.
What changed? In the late 1940s, Romer said, "We learned something from Keynes about how to prevent recessions, i.e., how to use monetary policy to counter economic shocks."
"But the newfound competence eventually turned into hubris," she added.
During the Vietnam War and the years after the 1973 oil shock, she says, "we expanded too much and created a lot of inflation."
To undo its own mistakes, the Fed had to create some truly nasty recessions, including the severe recession of 1980-82 engineered by Paul Volcker, then the Fed's chairman. Ever since, central bankers have managed to avoid overexpansion, and the only recession, the one largely precipitated by a consumer pullback in response to the outbreak of the 1990-91 Persian Gulf war, was relatively short-lived and shallow.
With the Fed's having shown restraint in the past, Romer said, "We don't have to create a recession to get inflation down."
Ms. Romer says that Alan Greenspan, who has been in charge at the Fed since 1987, has been lucky as well as smart. Trouble in the rest of the world, paradoxically, turned out to be a boon for the American economy. Tough times abroad helped hold inflation down as the prices of raw materials and imports collapsed and foreigners poured their money into Wall Street.
As for American consumers, they are behaving as if bad times are far, far away. With unemployment at a 30-year low, inflation-adjusted take-home pay rising handily, and spirits about as high as they have ever been, consumers are spending all of their income -- and then some. In addition, the well-heeled are cashing in some of their stock market gains while just about everyone else is taking advantage of easy credit to borrow more.
After-tax personal income soared at a 4.6 percent annual rate this winter, but spending rose at an even headier 6.7 percent annual rate and the personal savings rate, already around zero, fell into negative territory to the lowest level, minus five-tenths of a percent, ever recorded. (The measure, while seriously flawed, nonetheless clearly shows that Americans are saving less than they were just a year or two ago.)
Business, which has been having trouble passing higher costs along to customers, is spending freely once again as well to improve its efficiency. Although the growth of computer purchases slowed this winter, businesses invested heavily in low-technology gear, new office space and the like.
What could go wrong? A meltdown in the stock market could spook consumers into becoming born-again savers. Another deterioration in growth abroad -- at the moment things look a bit firmer -- could reverse the budding spring revival in manufacturing that seems to be under way. And inflation may start to simmer again.
For now, however, these are just risks, not realities.
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