Focus on the economy: The end isn't near...but repent anyway!

Real Estate Issues,  Winter 1999/2000  by Kelly, Hugh F

• E-mail
• Print
• Link

Well, we have gotten through Y2K without needing to draw on all that bottled water and canned food. The survivalists have come back from the mountains. The confetti is cleaned up from Times Square. Airplanes didn't fall from the sky. At last report, ATMs had not cycled back to the year "00" and were still dispensing dollars, not wampum. Even the hangovers have gone away by now.

When I was growing up, magazine cartoonists had clipart of a bearded, rumpled old man carrying a sign saying, "The End is Near!" The punch line would vary, depending on the news of the day. But the comedy was always the same: the out-of-touch doomsayer with the millenarian message versus the gogetters who made the world revolve. We, the readers, always knew something that the local Nostradamus couldn't see and our laughter never involved adopting his perspective. The end wasn't near; the party was destined to go on. That was the point of the joke.

By the time this edition of Real Estate Issues is in your hands, we will have passed another significant event on the calendar. The present economic expansion will have set a new record for longevity. Young people who were in grade school at the time of the last recession will be preparing for their college graduations. Their fortunate older brothers and sisters, who were given a few shares of Microsoft as a graduation present in 1991, are now gazillionaires if they have had the sense to hold on to their grub-stake. When will the party end? Even for those of us who still cling to a belief in the business cycle, there is no date fixed for the ball to drop, signaling the end of this extraordinary period of growth. Our economic times are worth reflecting upon, as they have been exceptional not only in length, but in the magnitude and the character of their vigorous gains.

First, it should be said that no expansion dies of old age. Typically, recessions are the result of either economic suicide or homicide. The "suicide" scenario involves death from overdose, too much of the high life that overheats some critical economic sectors until a reaction sets in. Such recessions are, in effect, corrective measures in our economic system. "Suicide" is probably too final a term, as the mechanism of a recession in fact serves to slow down the economic pulse, rather than arrest the heartbeat entirely. The "homicide" recessions are those either deliberately induced (such as the inflation-killing recessions of the early '80s, engineered by the Fed under Paul Volker) or those that are triggered by hostile maneuvering (including the oil crisis downturn of the mid-'70s and the Gulf War recession of nine years ago). Again, "homicide" overstates the case since we have, up to now, always been able to rebound from the crisis.

Second, and notwithstanding the frequency with which we see real GDP growth soaring above four percent, this economy has not been hitting on all cylinders. We have been congratulating ourselves about the breadth of the American economic revival, most notably seen in a three-month skein of 4.1 percent national unemployment, the best jobless rate in 30 years. But we actually have had many soft spots in the past year or two. A simple list would include:

A manufacturing sector which has seen recent employment losses in all industries except for automobiles

A capacity utilization rate that was 80.7 percent in October, an indication that our production chain is relatively slack given the duration of this expansion and that the surge of investment in plant and equipment during the '90s is seeing suboptimal returns

A negative trade balance of historic proportions, with each quarter's dip in the current account creating a drag, now approaching $100 billion every three months, on total GDP

An absolute drop in exports (not just a lag relative to high import volumes) from approximately $680 billion in 1997 to $660 billion in 1999

Federal belt-tightening that has seen government spending growth slip behind real GDP increases, not only in social programs but in defense (0.9 percent nominal growth in Fiscal 2000, or a loss in constant dollar spending) and in net interest payments to the private sector (one of the consequences of a budget surplus that lets us retire high-yield Treasury debt)

An agricultural economy that is truly distressed, with net farm income at its lowest level in a decade

We shall probably never know the extent of the productivity wasted in the obsessive attempt to exterminate the Y2K computer bug, but it cost at least a couple of decimal points in GDP during 1998 and 1999.

In the face of such measures, it is all the most stunning that we have not only kept growing for so long, but have continued to expand robustly. The list immediately above, however, does not exhaust the sources of concern. Socially, we have to worry about our incredible shrinking savings rate, the persistence of the underclass in the midst of general prosperity, and the question of why - for all our wealthwe find large swaths of the population unable to find decent housing, medical care, or quality public education. And, with the Japanese model squarely before us, we need to consider the helium-powered stock market and the potential consequences of Wall Street running out of gas in the near future.