Eight years and the US boom goes on
The very scale of the achievement raises inevitable questions of `why?' and `how long?'
Friday 30 April 1999
It is an astounding achievement, all the more so because the last two years have seen the US driving on swiftly into the headwind of sharp recession in east Asia and relative stagnation in much of continental Europe. The very scale of the achievement raises inevitable questions of "why?" and "how long?"
For the "why?" I'm grateful to some work by the Conference Board, a US research group which has developed its own index of leading indicators covering the labour market, manufacturing, household and financial indicators. Its conclusion, looking at the signals that this gives and applying the appropriate lags, is that there is very little danger of recession this year, less in fact than there has been at several earlier stages in the expansion (see graph).
The strongest driver of this index - the key thing which gives the Conference Board the confidence that the US outlook is secure - is finance. Low short- term interest rates and plentiful liquidity should enable the expansion to carry on, since there has been no recession since the Second World War which has not been preceded by a sharp rise in interest rates. So providing this congruence of low interest rates, rapid growth in money supply and rising asset prices continues, all seems set fair.
Meanwhile, consumers have found their confidence bolstered by the rising value of their share portfolios and their houses. Last year personal income rose by 4 per cent, the largest increase in the 1990s. There was a rise in the number of people in work and in the number of hours people worked, as well as wage increases in the 4-4.5 per cent region. So people keep will keep spending (right-hand chart), and while they do so the US economy will remain bullet-proof.
If it is relatively easy to answer the "why?" question, what about the "how long?".
Trying to answer that becomes a bit like an exercise in rounding up the usual suspects. There are a number of different things that might end the expansion and we know what they are. The problem is to know which ones will break cover and show themselves to the world.
Start with the obvious. There are, first, three things which would put pressure on consumer spending: a rise in inflation and interest rates, a rise in unemployment, and a fall in share prices. We know enough about the history of economic cycles to know that all are not just possible but - sooner or later - inevitable.
The only real issue is whether, when this clutch of negatives comes along, they will show themselves in a benign or a malevolent form. If benign, we get a period of below-trend growth which enables the economy to rebuild some slack without actually going into recession. If malevolent, then recession looms.
Aside from these direct influences on US domestic consumption, there are also potential external influences. Were the euro to attract a little more confidence, there could be a gradual switch of assets away from the dollar. A falling dollar might in the long run help US exports and help demand that way, but it would put pressure on US interest rates because of the impact on prices.
One of the main reasons why US price performance has been so impressive is because of the combination of a strong dollar and low commodity prices. The commodity price cycle may possibly have turned (the oil cycle seems to have done so), and at some level eventually the dollar cycle will turn. When it does, inflation will re-emerge.
Beyond that sort of probably gradual change, there is the chance of an external shock: something that suddenly changes the mood of the world economy. The most obvious candidate is the millennium bug or Y2K: either actual disruption because of computer failures around the turn of the year or feared disruption.
Such is the way of the world, that usually it is the thing you don't foresee which will bite you in the backside. The one absolutely certain thing that can be said about the Y2K problem is that it has not just been foreseen; we have been bored almost to destruction by it. I suppose the most sensible thing to say about Y2K is simply that the millennium comes at an awkward time in the global economic cycle.
But all this is to carp. Sure, the macro-economic discussion about the long American boom has to look towards its eventual end, but to focus on the macro-numbers is to ignore the qualitative aspects of this particular expansion, the things which make it different from the others.
It will be another three or four years before we can hope to see this boom in any perspective, but however it ends - whether with a squeak or a bang - the new element will always be the way it has been influenced by the communications technology of the Internet. If we are in the latter stages of the expansion we are still in the very early stages of the exploitation of this new technology.
It is overwhelmingly an American phenomenon, in the sense that it has been in the States where the potential applications have been most rapidly exploited. The latter stages of this boom have been overwhelmingly technology- driven.
Every boom is different, and this one is no exception. My guess is that it will indeed just surpass the 1960s expansion in its longevity, but the thing it will be remembered for will not be that: it will be the way it spawned a new technology which gives a glimpse of the future.
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