Americans end 1998 richer than they began
December 27, 1998
by Irwin Stelzer
THE YEAR ending on Thursday has been a traumatic one, but only for regular readers of the business news. More casual observers who might have scanned the business section at the start of the year and only returned to it now would be better placed. For them, all is calm. American shares are higher than they were and inflation, running at only 1.5%, remains as tame as it was at the start of the year. The jobs market remains good, interest rates are still at satisfactory levels and consumers continue to shop.
In short, the American economy seems not to have changed much: things are about where they were on January 1. But fill in the blanks between then and now and you get a different picture, one of a roller coaster having come to rest at its starting point, after a hair-raising series of swoops and plunges. The disembarking riders can be forgiven for feeling a bit dizzy in the head and queasy in the stomach.
Investors, of course, are the most exhausted of the riders. They have seen the value of their portfolios plunge at times by as much as 20%, tempting them to flee to the safety of government bonds - only to find that escape from volatility a costly one, as shares soon rebounded. Those with steadier nerves, and that seems to include most small investors, will end the year with a tidy gain of about 15%-20%.
Worse still, those who follow the economy regularly have lived through scary reports that Asia is in terminal crisis and that the Asian contagion is headed to Europe, with stopovers in Latin America and the United States. But already the first painful and halting steps towards recovery are being taken. And the Asian contagion has not proved virulent enough to upset even the nearby Australian economy, which continues to grow at a highly satisfactory 5% annual rate.
Then there is Russia. A combination of the old communist nomenklatura and the new mafia produced a predictable implosion of the economy, which is now producing fewer goods and services than Denmark. This is scary stuff, with Russia still armed to the teeth with nuclear weapons that can be retargeted on London and Washington in minutes and already at war with its foreign creditors.
But again, the headlines proved scarier than the reality. The tiny Russian economy can boom or bust, inflate or deflate, with no consequence for anyone except the long-suffering Russian people and the Western bankers who ignored all the warnings that this country would borrow and borrow and then run the printing presses to produce worthless roubles with which to repay those debts.
Indeed, the troubles of the world produced some real benefits for Americans. The oil price fell by more than a third during the year to real levels not seen in 25 years, guaranteeing Americans cheap petrol for their cars. And what cars they are: in 1998, for the first time, the sales of giant sports utility vehicles and trucks exceeded those of conventional cars, turning green environmentalists red with rage. Arab sheikhs in oil-producing nations may find the era of cheap oil a threat to their ability to maintain their private jets, but American consumers smile, fill the tanks of their gas-guzzling vehicles with cheap petrol and head for the open road.
Cheap fuel was not the only bonanza for Americans in 1998. With Asia and Russia in recession, its desperate manufacturers are marking down the prices of everything from trainers and T-shirts to steel and cars. This has helped full-employment America to avoid inflation, even in the face of progressive interest rate cuts by the Federal Reserve.
And Americans are fully employed. The unemployment rate is an astonishingly low 4.4%, as layoffs by manufacturers hurt by conditions in Asia are more than offset by the job creation of other, mostly smaller, firms in the service industries. During the year manufacturing employment fell by 200,000, but overall employment rose by 3.5m.
With prices stable and average earnings rising, the year ended with more Americans having more real purchasing power than when it opened. With share prices up, they are also richer than when they last sang auld lang syne. Little wonder they have been able to buy 15m cars and a record number of homes.
But some trends that emerged in 1998 may come back to haunt America in 1999. The trade deficit soared, as shrunken overseas markets crippled exports and low prices fueled imports. To help stabilise Asian economies and calm investors temporarily discomfited by falling share prices, the Fed cut interest rates, perhaps sowing the seeds for an unsustainable inflation in asset prices - a bubble doomed to burst before we are long into the new year. The employment cost index accelerated, perhaps laying the basis for cost-push inflation sometime in 1999. And American consumers are spending more than they earn, perhaps putting themselves in a position where they will have to cut back sharply on their spending at the first sign of even a modest downturn.
Add to these straws in the wind the impending birth of the euro. Whether it will prove to be a stable currency, or to be so strong as to cripple European exports, or so weak as to set off a round of inflation in euroland, nobody can predict. Nor is it possible to guess whether the euro will challenge the dollar's position as the world's currency of choice.
To find out how all of these uncertainties will play out, tune in next week, when I will make some guesses as to what the American economy will look like in the last year of the 20th century.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.