Party goes on as wages rise faster than spending
January 5, 1999
by Irwin Stelzer
SOMETIME during last summer, when it looked as if the world economy might be heading for disaster, Alan Greenspan, the Federal Reserve chairman, remarked: "We know . . . from history . . . that a correction is likely. What we cannot say is when." Well, most forecasters now think they know when - sometime in 1999. Falling profits must, they argue, be followed by a much overdue drop in share prices. The eventual triumph of the bears, in turn, will cause consumers' euphoria to evaporate. No longer will they spend more than they earn, as they did during parts of 1998.
That means America will abdicate its role as the world's consumer of last resort, causing the green shoots of recovery now visible in some Asian countries to wither and tipping Latin America from slow growth into recession. Russia, of course, will remain a basket case, its only saleable products being oil at falling prices and the technical knowledge to make weapons of mass destruction.
Meanwhile, European growth will grind to a halt, as new leftish governments drive up labour costs, increase the already crushing tax burden on businesses and abandon the fiscal austerity no longer required of them now the euro has been launched. Worse still, protectionism will be back in vogue. In Europe, governments that have made their economies non-competitive in an effort to avoid reforming their welfare systems and labour markets, will adopt the protectionist measures France has always urged on its continental brethren. And in America, as cheap imports result in mounting lay-offs, industry after industry will appeal for protection.
So say those who predict that 1999 will be the year in which America's irrationally exuberant investors and wildly spendthrift consumers will get their comeuppance. About the best that the gloomy set can muster is a prediction of what Lehman Brothers dubs "a growth recession", with economic growth falling from its 1998 rate of close to 4% to a mere 1.7%. Indeed, Lehman's chief global economist says: "If consumers become concerned about their low saving rate, growth recession could easily become full-blown recession, in a malign interaction with a weakening stock market." Economists at Coutts bank are gloomier still. They expect American corporate profits to fall 5% this year and economic growth to slow to a paltry 1.2%.
The problem with these forecasts is that they have been made before and been proved wrong - consistently. That does not mean the pessimists are wrong again, only that their forecasts should be taken with the same grains of salt as the cheerier ones. After all, almost every economic indicator is flashing more good times ahead.
Most car makers chalked up record sales in 1998 and they are gearing up to increase production this year. Sales of new and existing homes are at levels that continue to astonish those who have been predicting a slowdown in this key sector. November's durable-goods sales were up 3.4% on 1997 (excluding the volatile transport sector). Almost three out of four firms surveyed by Business Week say business is good or very good.
Most crucially, consumer confidence remains high, a consequence of the negligible unemployment rate and of rising personal incomes, which in November grew at their fastest rate in nine months. Lynn Franco, who conducts the Conference Board's consumer confidence survey, told The Wall Street Journal: "The conditions fuelling this expansion show no indication of dissipating any time soon."
The key question is whether consumers can continue to fuel growth or are so over-extended they will pull back at the first sign of stock-market weakness. This brings us back to the so-called negative savings rate. This is a deeply flawed figure. Among other things, it does not include capital gains people realise on their share sales but does count the taxes paid on those gains. Consider instead the fact that in the past two years wages have risen faster than spending, meaning that Americans have had something left over from their pay cheques to put in the bank or into shares. And they are $8 trillion richer than they were six years ago, making it not irrational to have a bit of a party.
Indeed, looking further down the road than to the end of 1999, it is possible to say America's economic prospects are good for as far ahead as one can hope to see. Low commodity prices, especially for oil, are the equivalent of a tax cut, freeing up consumer spending power. Productivity seems to be rising, especially in services, which are not represented in official figures.
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.