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Economic News, Data and Analysis

1998: More of the Same?

You know it’s been a good year for the U.S. economy when public debate
turns to trade policy. People don’t have inflation
or high unemployment to worry about, and the stock market is doing well.
Productivity is picking up a bit. Even the federal deficit seems to have
disappeared before our eyes! There is still the nagging problem of stagnant
wages at the lower end of the income distribution, but it appears that
some small progress is being made on that front.

Since it is the end of 1997, I thought I’d spend a bit of time assessing
the performance of the economy over the past year and looking ahead to
1998.

Just The Facts

 

 
























































1996 1997
Real GDP Growth* 2.7% 3.9%
Productivity Growth*  1.4% 2.5%
Unemployment Rate* 5.3% 4.6%
Growth in Avg Real Wkly Earnings* 0.6% 3.1%
CPI Inflation* 3.2% 1.8%
Federal Deficit* $250 Billion $188 Billion 
Savings Rate* 4.1% 4.2%
Interest rates (federal funds)* 5.30% 5.46%
Interest rates (morgage)* 7.8% 7.6%
Consumer Confidence*: 28 Year high at 134.5

Note: Most data is current through November. Comparisons
are made to equivalent period in previous year.

New Economy vs. Law of Averages

So, will the economy continue to do as well in 1998?  There seem
to be two camps on the subject.

The first consist of those who extoll the powers of the “New Economy”
or the “New Economic Paradigm”. These optimists believe that the battle
against inflation has been won and that fundamental changes in the economy
have, in effect, raised the speed limit. I’m being intentionally vague
about the “fundamental changes” since the term “New Economy” has no clear
definition and means many different things to many different people – although
a perceived (if not measured) increase in the rate of technological progress
seems to play a role in most of the stories.

On the other side are the pessimists who see the economy nearing the
upper end of its potential, and are waiting for something to break. In
particular, they are waiting for the tight labor market to force wage increases.
This will in turn lead to price increases, which will then force the Fed
to clamp down on the economy to stop emerging inflation.

Also, part of this second crowd are the true believers in the “Law of
Averages”. Everyone knows this law: if you flip a fair coin 5 times and
each time it comes up heads, the next time it’s almost certainly going
to come up tails. Much economic reporting seems to rely on this “Law” –
how many times has the announcement of good economic news been followed
with “but how long can this go on…” As such this camp has seen a long
streak of good years and believe that the next will almost certainly see
a downturn.

My predictions

What will 1998 bring for the economy? I must say that I’m skeptical
about my own ability to gaze into the crystal ball to predict the future.
The consensus forecast (I’m guessing here) is that the economy will slow
somewhat in 1998, but will remain fundamentally healthy.

For my own view, I’ve been somewhat surprised by the lack of an inflationary
response to the strong economy – this seems to point to the possibility
that the current strength may be sustainable for the near future. Of course,
I wouldn’t be a good economist if I didn’t point out the other side of
things – I’d say that there is a decent (say 35%) chance that inflation
will blip up early in the year bringing Fed action resulting in a slowdown
by the third or fourth quarter. My other 65% says that 1998 will look a
lot like 1997.

If you want my specific predictions – just replace “1997” in the table
above with “1998”.


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