Sunday, October 10, 1999

Crystal ball cloudy

But slowdown wouldn't surprise our economic panel

The Cincinnati Enquirer

        Agreement is almost universal: What we have today, we won't have next year. Economic growth will slow, weighted down by higher interest rates and lower stock prices. But so far the American consumer isn't buying it, says the Enquirer's Board of Economists.

        “I think we're going to have a great Christmas,” said the University of Cincinnati's George Vredeveld. “Income is up, wages and salaries are up, the wealth effect is up. We haven't seen any substantial downturns in consumer confidence. What's going to hold us back?”

        The Federal Reserve, for one, says Federated Department Stores' Brian Richard. Consumer spending has been growing faster than the economy overall, he said. The Fed thinks that's too fast.

        “The Fed wants to see consumer spending slow down, and they will accomplish that one way or the other,” he said. “It'll either happen on its own, or they'll keep pushing these rates until they get that response.”

        What the board described over lunch recently is a complex chain of events that sets up a tricky set of choices for the Federal Reserve and other policy makers. It adds up to an economic slowdown — not a recession — that one way or another, sooner or later, will come back to consumers.

        But it's all based on deduction, without a whole lot evidence. “What has slowed down?” asked David Hehman of the Federal Home Loan Bank of Cincinnati. “Retail sales? No. Housing sales? No. Wage increases are starting to pick up, union settlements are starting to pick up.

        “I use the airplane thermometer: Get on an airplane. When's the last time you were on an airplane with an empty seat?” he said. “I don't see any slowdown.”

        Mr. Vredeveld quoted one economist who said the economy is bound to slow down because the current expansion “is getting long in the tooth.”

        “We keep on predicting this slowdown because we believe in business cycles,” he said. “I don't understand. Why predict it's going to end?”

        So, let's not get carried away with talk of a slowdown, he said. After all, what's wrong with going from 3.8 percent growth this year — just a hair off the 3.9 percent posted in 1997 and 1998 — to about 2.8 percent in 2000? That wouldn't even be the worst year of the current eight-year-long expansion.

        “I think that growth has been so substantial we should probably think in terms of longer-run history,” Mr. Vredeveld said. “Will growth fall below 2 percent? Or will growth fall below 2.5 percent, which we've always regarded as pretty healthy growth? I don't think it will.”

        But the roots of the expected slowdown are overseas. Weak foreign economies are regaining their health.

        “The good news is foreign economies seem to be picking up,” said Miami University's James Brock, “and the bad news is foreign economies seem to be picking up.”

        It's good because when they're healthy, it means stronger demand for goods made in the United States — and that's good for American manufacturers, workers and the balance of trade.

        “But I wonder what's going to happen: Their currencies are going to strengthen relative to the dollar, and that's going to lessen the lid that imports have kept on prices,” Mr. Brock said.

        That could mean higher prices for such items as cars and steel, he said. Benefits to American manufacturers could be broad, because so many companies export.

        Still, some of the foreign economies are fragile enough to keep the Fed thinking twice about raising interest rates, said Cinergy's Richard Stevie. Rising interest rates mean a stronger dollar, weakening foreign currencies.

        “Some of the banking systems in other countries are still teetering,” he said. “If the Fed pushes interest rates up too far, that could cause them to have a credit crunch.”

        In addition, “energy prices have been really shooting higher and higher, and I don't see them coming down,” said Alex Tshiunza of the OKI Regional Council of Governments.

        That's been a big reason why inflation has been low as the U.S. economy expanded so windlessly the past few years. Prices of crude oil and heating oil are up since June 1, and that changes the underpinnings of low inflation.

        “The fact that energy prices are going up also doesn't bother me,” said Xavier University's Melanie Blackwell, “but you have to remember I'm an environmental economist. And I've always thought for a long time (energy was) way underpriced.”

        Well, How high should a gallon of gas be priced? the panel asked her.

        “Higher than what they are right now,” she said — whatever the price would be to reduce pollution and pollution-related health problems.

        Still, rising oil prices and potentially higher prices for imported goods change the picture on continued low inflation, which has been an important pillar supporting the current economic expansion.

        “We've had a lot of good luck with inflation,” Mr. Stevie said.

        The choice for the Fed becomes: Should interest rates be raised to cool consumer spending? Or does fear of hurting fragile recoveries in foreign economies keep the Fed from taking action? The National Association of Manufacturers, for one, was glad last week the Fed didn't raise interest rates, because doing so might have hurt “erratic” foreign recoveries.

        It's also an open question whether the Fed can get ahead of the game.

        “It seems to me the markets have become so efficient, so global, that the Federal Reserve is somewhat limited,” Mr. Hehman said.

        The moves to raise rates this summer appear reactive, he said. Mr. Richard agreed, saying the bond markets jump at any indication of inflation, well ahead of any action by the Fed.

        Regardless, “when you're talking about slowing the economy down, you're not looking three months ahead, you're looking 12 months ahead,” Mr. Richard said. “I don't think you see European or Asian demand building so fast it's going to have this dramatic impact.”

        Y2K issues only cloud the picture. Companies appear to be building inventories, so they're not caught short if “millennium bug” computer problems disrupt supplies. That's going to push up growth in the last three months of this year, and depress growth in the first three months of next year.

        Mr. Richard said it'll be spring before anybody can judge exactly where the economy is heading. “I think if the economy slows down ... it won't be noticeable till the middle of the year.”

        Mr. Vredeveld agreed. The strong stock market of the past few years has been credited with helping consumers feel wealthier, giving them the confidence to make large purchases. He said even if the market were to decline 10 percent, the effects probably wouldn't be felt until next year.


        The Enquirer's Board of Economists combines people from the public and private sectors and academia. The board meets quarterly. Members:

        • Melanie Blackwell, economics professor at Xavier University.

        • James Brock, l economics professor at Miami University.

        • David Hehman, executive vice president and chief financial officer at the Federal Home Loan Bank of Cincinnati.

        • Brian Richard, director of economics, Federated Department Stores Inc.

        • Richard Stevie, general manager of market analysis, Cinergy Corp.

        • Alex Tshiunza, staff economist with the Ohio-Kentucky-Indiana Regional Council of Governments.

        • George Vredeveld, director of the Center for Economic Education at the University of Cincinnati.


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