Can't keep a good boom down

Still, a big trade deficit, inflation worries, and high personal debt may portend trouble ahead.

Economist David Wyss has been trying to drive the US economy into a recession - on his computer.

First he tried a stock market crash. Then he threw in a collapse of the Asian economies. Finally, he added a really slow response to those crises from Federal Reserve Chairman Alan Greenspan.

"We get a mild recession," says the economist for Standard & Poor's DRI in Lexington, Mass., almost apologetic his computerized disasters can't produce more of a reaction.

As Mr. Wyss's experience suggests, the US economy is almost unstoppable. The economic recovery is heading into its 107th month - a record - and there are few forecasts that the boom is ready to go bust.

In its most recent poll of 50 economists, the Blue Chip Economic Indicators found no economists predicting a recession or even a sharp slowdown in growth. The continued boom leads to the question: How much longer can the economy grow?

The short term answer is: for some time.

For the past two quarters, the gross domestic product is up an average of 5.75 percent (on an annual basis).

Consumer confidence is hitting record levels. Despite rising interest rates, home sales are rising. And in January, car sales accelerated.

The strength of the economy and the threat of inflation are the main reasons the Fed opted on Wednesday to raise interest rates by a quarter of a percentage point. Most economists expect the Federal Reserve to increase rates again on March 21. The Fed hinted as much by noting that it was concerned that increases in demand would exceed the growth in potential supply.

"Such trends could foster inflationary imbalance that would undermine the economy's record ... expansion," said the Fed.

To make the Fed's dire comments come true, Wyss says the economy would have to misbehave over time. For example, almost every post-war recession has had a build-up of inflation over two years. "So far, those kinds of inflation trends are not apparent," says Wyss.

Fed hits the brakes

Still, few economists fault the Fed for trying to slow the economy down.

Joblessness is expected to slip below 4 percent - perhaps as early as today. "The Fed does not want to see further declines in the unemployment rate," says Bruce Steinberg, chief economist for Merrill Lynch.

The surge in the stock market has stimulated consumer and business spending, economists say, and the personal savings rate has fallen to the lowest level since the Great Depression. "If all of that continues, we will have inflation, and those threats require the Fed to slow the economy to a sustainable pace," says Lyle Gramley, a former Fed governor and economic consultant to the Mortgage Bankers Association in Washington.

What represents a sustainable pace? Mr. Steinberg figures the economy can grow at about a 4 percent annual rate without causing inflation to ratchet up. This assumes a 1 percent increase in the labor force and a 3 percent pace for productivity.

Over the long term, productivity improvements are changing the business world. Companies are looking at new ways to build old products. They are using the power of the Internet - and its enormous capacity to move information - to change the way work gets done. The result helps to smooth out the wrinkles in producing everything from steel to buildings.

Take the construction industry. In the past, erecting a commercial tower involved tens of thousands of documents. Most of the paper moved by hand between the dozens of companies doing everything from putting in duct work to running wiring.

Today new companies are using the Internet to change the industry. "By managing the communications for the whole project, we're vastly reducing the confusion, redundancy, and litigation," says John Macomber, whose Collaborative Structures started four years ago. "We're not only trying to restructure the way jobs are done, but the whole industry."

This change was recently noted by Greenspan. Because of technology improvements, he said, business uncertainty has been reduced. That has reduced the "risk premium" inherent in loans. In other words, investors feel more secure, and borrowers get easier access to credit.

Despite these changes, economists still see clouds on the horizon:

There are imbalances building up. President Clinton, in a meeting with reporters this week, said he was concerned about the enormous trade deficit.

A lot of this money returns to the US as investments. But Gramley worries that there may come a time when foreigners are not interested in US investments, particularly as their own economies begin to grow. "The dollar could fall and interest rates go up."

There could be some friction building up in the economy. For example, there could be production bottlenecks or labor shortages, which result in higher costs. One sign that the capital markets are concerned can be seen in the bond market. Short-term interest rates have moved higher than some long-term rates, sometimes an early warning sign of an economic slowdown.

The Federal Reserve or the US government could make a policy mistake. A huge tax cut at a time when the economy is robust would frighten the financial markets. Others say it would also be a policy mistake for the Fed to tighten too quickly. So far, Greenspan has increased interest rates in quarter-point increments, a very gradual approach.

Some of these worries have already found their way to Wall Street. In fact, some economic forecasters are predicting a recession in late 2001 or early 2002.

In this scenario, the Fed's first effort to halt inflation fails. "A second tightening puts the economy into a mild recession," says David McClain, dean of the University of Hawaii's business school. Personally, Mr. McClain sees the Fed tightening rates, but not enough for a recession.

Recession? What's a recession?

There are now a considerable number of young start-up companies that have never seen a downturn. That's the case with BargainDog.com, a Web site started last year by Josh Schanker, a 1998 graduate of Harvard University in Cambridge, Mass. During the last recession, Mr. Schanker was a junior at Syosset High School on Long Island. He actually remembers the downturn because he was performing in an off-Broadway play.

"Live theater is one of the areas hit the most, because in a recession people go to movies instead. And when they stop going to the movies, they watch television," he says.

However, a recession is not high on the list of things Schanker worries about. He's about to start raising more capital for his company. And he thinks investors will still be interested in the "enormous potential" of the Internet. "My take is that although there are positive and negative signs, the Internet is not one big bubble about to burst."

Mr. Clinton, however, says he has some worries. In his interview with reporters, Clinton talked about the argument pessimists make about the economy - that the stock market is so high that both business and consumers feel they can afford higher debt loads. "The people loaning the money are so confident because the economy is so good, they're loaning money at the margins [that] they might not otherwise loan if they had a good night's sleep," says Clinton, adding, "I'm concerned about that."

But bad loans are not likely to bring the economy down, says Wyss. "It's only if inflation takes off that we have problems."

*Previous stories in this series ran on Jan. 28 and 31 and Feb.1 and 3.

(c) Copyright 2000. The Christian Science Publishing Society