Interesting piece in the New York Times from David Leonhardt - describing itself as the skeptical economic view - about what there may be waiting for us just around the corner. As he indicates each new month of layoffs and other corporate cost-cutting begins to make what was supposed to be the temporary exception look more like a rule. He asks out loud the question that many more must be asking themselves silently: what if this decade's growth looks different from that of the 90's? In his support he cites productivity heavyweight Dale Jorgenson as saying: "When it all comes out, we're going to have a significantly less sanguine outlook than we did in the late 90's." In particular Jorgenson draws attention to the declining rate of expansion which is to be anticipated for the American workforce, suggesting that the slowing of labor force growth will also slow economic growth. Estimates indicate that the number of hours worked in the United States grew more than 2 percent a year in the late 90's, whilst in the years to come, a best guess is that it will probably grow by only about about 1 percent each year. As Jorgenson says,"that's a huge bite out of growth,"..... "we're not going to have the 4 percent growth rate we had during the boom." What's the betting we may soon all be calling ourselves the 'new skeptics'?
ith the battles having begun in Iraq, the United States economy once again looks as if it might be on the cusp of emerging from its torpor. The Standard & Poor's 500-stock index rose more last week than it did during any week since September 2001, and Wall Street forecasters predict that a quick military victory will reduce economic uncertainty, causing a surge of corporate and consumer spending.
But this has become a familiar refrain. A year and a half ago, many economists said that the country would prosper as soon as it recovered from the Sept. 11 attacks. Early last year, the scandals at Enron, Worldcom and elsewhere were supposed to be all that was preventing a new boom. With each new month of layoffs and other corporate cost-cutting, however, the exceptions begin to look more like a rule. Increasingly, corporate executives and some economists worry that the slow-growth economy of the last three years might in fact be the new reality, one that will bedevil workers and investors for a few more years. "When it all comes out, we're going to have a significantly less sanguine outlook than we did in the late 90's," said Dale W. Jorgenson, an economist at Harvard University and an expert in productivity, widely seen as the most important factor for future growth. "That's something we're just going to have to get used to."
Economic turning points rarely announce themselves clearly, and rapid growth might truly be just around the corner this time, thanks to the Federal Reserve's reduction of short-term interest rates, say, or a technology breakthrough yet to be understood. At the least, a victory in Iraq seems likely to cause a spurt of optimism and economic activity.
But there are tangible reasons to doubt that the United States will soon return to the heady times of the late 1990's. The federal budget deficit is rising, and the aging of the population will slow the growth of the labor force. Consumers will probably not increase their spending as rapidly as they did in recent years, and businesses — having invested so much in the boom years — still have a lot of idle factories and machinery."The effects of the bursting of the stock market bubble have proven to be far more long term and pervasive than expected," William J. McDonough, the president of the Federal Reserve Bank of New York, said in a speech on Thursday. He specifically mentioned continuing doubts about corporate accounting and governance as a drag on growth. The war with Iraq and the occupation that will follow are certain to deepen a budget deficit that without the war would exceed $300 billion next
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March 24, 2003
Skeptical Economic View Takes in More Than Iraq
By DAVID LEONHARDT
ith the battles having begun in Iraq, the United States economy once again looks as if it might be on the cusp of emerging from its torpor. The Standard & Poor's 500-stock index rose more last week than it did during any week since September 2001, and Wall Street forecasters predict that a quick military victory will reduce economic uncertainty, causing a surge of corporate and consumer spending.
But this has become a familiar refrain. A year and a half ago, many economists said that the country would prosper as soon as it recovered from the Sept. 11 attacks. Early last year, the scandals at Enron, Worldcom and elsewhere were supposed to be all that was preventing a new boom.
With each new month of layoffs and other corporate cost-cutting, however, the exceptions begin to look more like a rule. Increasingly, corporate executives and some economists worry that the slow-growth economy of the last three years might in fact be the new reality, one that will bedevil workers and investors for a few more years.
"When it all comes out, we're going to have a significantly less sanguine outlook than we did in the late 90's," said Dale W. Jorgenson, an economist at Harvard University and an expert in productivity, widely seen as the most important factor for future growth. "That's something we're just going to have to get used to."
Economic turning points rarely announce themselves clearly, and rapid growth might truly be just around the corner this time, thanks to the Federal Reserve's reduction of short-term interest rates, say, or a technology breakthrough yet to be understood. At the least, a victory in Iraq seems likely to cause a spurt of optimism and economic activity.
But there are tangible reasons to doubt that the United States will soon return to the heady times of the late 1990's. The federal budget deficit is rising, and the aging of the population will slow the growth of the labor force. Consumers will probably not increase their spending as rapidly as they did in recent years, and businesses — having invested so much in the boom years — still have a lot of idle factories and machinery.
"The effects of the bursting of the stock market bubble have proven to be far more long term and pervasive than expected," William J. McDonough, the president of the Federal Reserve Bank of New York, said in a speech on Thursday. He specifically mentioned continuing doubts about corporate accounting and governance as a drag on growth.
The war with Iraq and the occupation that will follow are certain to deepen a budget deficit that without the war would exceed $300 billion next year if President Bush's proposed tax cuts were to become law. Mr. Bush's recent statements about North Korea and the scope of the war on terrorism suggest that other conflicts are possible in coming years.
"The U.S. is going to take on quite an economic cost, whether it's successful militarily and politically or not," said Bob McKee, the chief economist at Independent Strategy, a consulting firm in London for large investors. "Nobody is much prepared to help."
Independent Strategy predicts that the war and its aftermath will cost almost $300 billion from now to 2006. William D. Nordhaus, a Yale economist who has analyzed past conflicts, estimates that the United States will have to spend $75 billion to $500 billion occupying Iraq.
Most economists think that higher deficits help cause higher long-term interest rates by increasing competition for savings. Higher rates, in turn, would sharply curtail mortgage refinancing and cool a housing industry that has been among the economy's few strengths. Until growth picks up and private demand for investment capital strengthens, few economists expect interest rates to move significantly higher.
Last year, low interest rates and rising home prices permitted households to take out $700 billion from their homes, through sales, refinancings and home equity loans, up from about $400 billion a year in the late 1990's, according to Economy.com. In a speech this month, Alan Greenspan, the chairman of the Federal Reserve, predicted that the pace of extraction would slow, "possibly notably lessening support to household purchases of goods and services."
Even with mortgage rates still near a three-decade low, the number of houses starting to be built declined 11 percent last month, according to the Census Bureau's seasonally adjusted figures. Cold weather played a role in the decline, but the drop also suggested that after a record surge of house buying in recent years, the number of people looking to buy new homes might not be growing as it once was.
Stocks, meanwhile, remain historically expensive, despite a market correction that recently passed its third birthday. The stocks in the Standard & Poor's 500 are trading at a price equal to about 30 times their earnings per share over the last year. At the end of the 1990-91 recession, that multiple was 18.
If stocks grow only modestly in coming years, consumers — particularly baby boomers, who are approaching retirement — are likely to increase their saving, at the expense of spending, economists say. Now, households are saving about 4 percent of their incomes, up from 2 percent during the boom but still well below their average of around 8 percent in the 70's, 80's and early 90's, according to the Commerce Department. Already, car buyers have shown some recent signs of ending their long shopping spree, and Ford and General Motors have announced that they will cut production. Of course, as the economic pillars of the last couple of years weaken, some rickety parts of the economy will stiffen. Corporate profits have improved somewhat, and executives will eventually start investing in new equipment and technology again. State governments will not be cutting their budgets forever. These are reasons that almost no economists think that the United States will fall into a prolonged and deep slump as Japan has. But there is still a great difference between booming and merely avoiding frequent recessions. Many top executives have focused on this difference, seeing the slow-growth economy as more than a temporary phenomenon. At the end of last year, most chief executives predicted continuing job cuts and economic growth of less than 2 percent this year, according to a survey by the Business Roundtable in Washington. Despite the deep cuts of the last two years, industrial companies are still using just 75 percent of their available capacity, less than they were during most of the 2001 recession. "This is a period of adjustment," said David A. Daberko, chief executive of the National City Corporation, a bank and large mortgage lender based in Cleveland. "We're going to run higher unemployment. We'll have less growth."
"The notion that consumers aren't willing to spend because of a military skirmish with Iraq is simply ludicrous, in our opinion," said Richard Yamarone, an economist at Argus Research in New York. Instead, the slowing of wage growth for most workers to a pace below inflation is leaving people with less money to spend, and the labor market does not appear poised for a quick recovery, he said. As baby boomers begin retiring, leaving the nation with fewer workers, wages could start to rise rapidly again. Over all, though, the slowing of labor force growth will also slow economic growth, economists warn, restricting the resources that the country has to pay for new investments or wars. Professor Jorgenson of Harvard estimated that the number of hours worked in the United States grew more than 2 percent a year in the late 90's. In coming years, it will probably grow about 1 percent each year. "That's a huge bite out of growth," he said. "We're not going to have the 4 percent growth rate we had during the boom."
Source: New York Times
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