UPS & DOWN
April 4, 1997
It's been a hectic week for financial markets and those who watch them. We're joined by representatives from four key industries to hear their views, and then by two economists to build a larger picture of the economy.
JIM LEHRER: The economy is our lead story tonight. Our economics correspondent, Paul Solman, of WGBH-Boston starts things off with some background.
PAUL SOLMAN: It's been a hectic week for financial markets and those who watch them. The rocky ride began with last week's meeting of the Federal Reserve when the central bank raised a key interest rate for the first time in two years. The Fed's aim: To cool, however slightly, a potentially overheating economy, thereby stifling inflation before it gets started, and also perhaps to cool down an arguably overheated stock market.
Though the Fed's move was widely anticipated, markets moved sharply in its wake. In just two days the Dow Jones Industrial Average dropped 300 points, 4 percent of its total value. And since the Fed's decision up until today, the Dow had lost 470 points, nearly 7 percent. Now, it could be that the Fed's interest rate boost is what staggered the market, or the Fed may simply have played a symbolic role or, frankly, none at all. But behind the Fed's actions and the market's reaction is a question that concerns every one of us: How buoyant is the U.S. economy at the moment? And what do economic data suggest with regard to its future prospects?
Well, here are some recent numbers. The Gross Domestic Product, or GDP, the most general measure of the economy, grew at a zesty 3.8 percent rate in the last quarter of 1996. One of the key indices of consumer confidence is at a 27 year high; on Tuesday, the nation's index of manufacturing activity hit a two-year high; housing starts are at a three-year high; and the economic expansion is now in its sixth year, a long stretch by any standard. Finally, today two more important numbers, new jobs and the unemployment statistics; this morning the Department of Labor announced that in March the unemployment rate dropped again, though modestly, from 5.3 to 5.2 percent. Meanwhile, in terms of jobs created March saw a modest increase of about 175,000, pretty much as expected. In the wake of today's employment figures the market rebounded somewhat, with the Dow rising 49 points.
JIM LEHRER: Now, how people in some key industries see the economy and to Elizabeth Farnsworth.
ELIZABETH FARNSWORTH: And we're joined by representatives of four sectors of the economy. Scott McNealy is chairman and CEO of Sun Microsystems, which designs, manufactures, and sells network computers and software in Mountainview, California; Warren Batts is chairman and CEO of the Tupperware Corporation and current chairman of the National Association of Manufacturers; Barbara Rackes is CEO Rackes Direct, a custom apparel catalog company in Columbia, South Carolina. She serves on the executive committee of the National Retail Federation; and Russell Booth is president of Mansell Commercial Real Estate Services in Midvale, Utah; he's the current president of the National Association of Realtors. Thank you all for being with us. Scott McNealy, how buoyant is the economy from your point of view?
SCOTT McNEALY, Sun Microsystems: Well, I think in the technology sector the economy is actually very strong. I mean, 2/3 of the planet dies without ever making or receiving a phone call. We've hardly hit saturation. The network is growing like crazy, whether it be the Internet or telephone networks, or whatever. Every time you move the network you need to sell more Internet-linking equipment, more servers, and more clients things like telephones and computers. So it's a pretty strong and robust market.
ELIZABETH FARNSWORTH: Something like 1/4 of economic growth last year came from the production and sale of computers. Is that likely to continue in the next couple of years, do you think, because of all the factors you just mentioned?
SCOTT McNEALY: Well, I think there will be some cyclical moves, but, in general, it will be moving up quite aggressively. I think with the consolidation, some of the new technology is confusing the market, like network computers, Java, and the Internet, causing some dislocation. The consolidation also causes some confusion, and you'll see some bumps in stocks but, in general, it's definitely an upward trend.
ELIZABETH FARNSWORTH: Barbara Rackes, consumer confidence is at a 27-year-high. Does that mean that retail sales are really good?
BARBARA RACKES, Rackes Direct: (Columbia, SC) Retail sales are extremely strong right now. In fact, it's probably the best it's been in perhaps the last four to five years. As you know, the retail industry has had a very difficult period in the recent past, and we are doing extremely well. In the Southeast--
ELIZABETH FARNSWORTH: Excuse me one minute. Difficult why, and why are you doing extremely well now? What's changed?
BARBARA RACKES: I'm sorry?
ELIZABETH FARNSWORTH: What's changed?
BARBARA RACKES: As consumer confidence is at an extreme high income, consumer income is very high, and I think people feel very good about their prospects for the future. The result of that, of course, is that people are buying consumable goods. The next step, of course, is that the Fed is going to quash that enthusiasm because as interest rates go up, the consumer is going to spend less on their durable goods, and the cycle will--exactly as the Fed intends it--start to cycle downward.
ELIZABETH FARNSWORTH: Ms. Rackes, what is particularly good and what is good in your industry?
BARBARA RACKES: There are a number of segments like any other industry that have peaks and valleys. For example, right now, anything that is in the home market is exceptionally good. People are doing lots of things. You noted a few minutes earlier in your tape that home starts are at a two-year high, and as a result, people are buying things for their homes. One of the other areas that is extremely strong right now is the leisure industry. Recreation is high. People are attempting to spend more and more of their time with their families, doing things that are active. So whether it's kayaking or canoeing or backpacks or casual clothing, all of those kinds of segments are high, whereas the workplace becomes more and more casual, things that are traditional, suiting, clothing types of things are having a little more difficulty now.
ELIZABETH FARNSWORTH: Okay. And I'll get back to you in a minute about your worry about the downturn in the Fed. Russell Booth, how does real estate fit into all this, both commercial and homes?
RUSSELL BOOTH, Mansell Commercial Real Estate Services: (Salt Lake City) Well, the overall economy is very stable, and because of that, and interest rates are at a modest level, and with the mild winter those three items, coupled together, caused that February was the second highest month on record for home sales, and that after a record-setting year in 1996 of 4.1 million homes, existing home sales, in the country. So overall, the real estate market in almost every segment of the country is very strong, viable, both in residential and in commercial.
ELIZABETH FARNSWORTH: Who's behind those homes? Are these first sales of homes, first home owners?
RUSSELL BOOTH: There are certainly many people that are the entry-level, first-time home buyers, that are fueling the home purchase market, but all levels of new home construction, of entry, and mid-size and luxury homes are still quite strong, and again in most areas of the country both the entry level and the move-up buyer are very active in the markets.
ELIZABETH FARNSWORTH: And, Warren Batts, we're in the sixth year of economic expansion. Are your sales expanding?
WARREN BATTS, Tupperware Corporation: (Chicago) Well, I represent two companies. At Tupperware, we're expanding primarily internationally. We get about 85 percent of our sales overseas. I'm also chairman of Freemark International, located here in Chicago, Deerfield.
ELIZABETH FARNSWORTH: And tell us what you make.
WARREN BATTS: We're basically a traditional manufacturing company making commercial food equipment, building materials, and consumer products. And I think like our associates in manufacturing, we're seeing the manufacturing industry strong, not too strong, beginning to flatten out. In the jobs report today, for instance, there are only 16,000 new jobs reported in manufacturing and, for instance--and another side of that, construction employment actually dropped a few thousand. So I would say we may see this year the flip side of last year. If you recall, last year we started off relatively soft, first half of the year, and strengthened throughout the year. That strength has carried forward now. We would expect it to slow down a little bit to maybe we'll have for the year a 2 to 2 ½ percent growth, a good year but not a boomer.
ELIZABETH FARNSWORTH: Mr. Batts, unemployment is especially low in the Midwest. It's down to 3.2, 3.3 percent in some parts of the Midwest. Is this driving up your wages?
WARREN BATTS: We've had about an average of 1 percent less employment in the Midwest now for a number of years. I think we have been averaging about 4 ½ percent unemployment here. And wages are only now beginning to go up. We're running short of skilled jobs. It takes longer to fill the jobs than it was in the past. We are filling them but wages aren't moving up very much. We have so much competition, both domestically and internationally, it's very hard to move up wages. And in manufacturing there's another factor that's coming into play, and it will come into play more as the year goes along, and that is the strength of the dollar. As you know, from August to February the yen strengthened by 15 or 20 percent. And we're already seeing a surge of Japanese cars in the United States, for instance. Well, these are jobs that are going back overseas, at least temporarily. So we've got several factors here that will tend to modify our year but still give us a good year.
ELIZABETH FARNSWORTH: Mr. McNealy, what about that, factors modifying your year? Is the low unemployment affecting you, making it hard to get really qualified workers?
SCOTT McNEALY: Well, in the technology industries, software developers, the software engineers, the hardware engineers are in incredibly short supply. Here in the valley, for instance, we're operating. I mean, you can't even get a building here in the valley.
ELIZABETH FARNSWORTH: In Silicon Valley?
SCOTT McNEALY: Yes, Silicon Valley--much less find an engineer to go fill the buildings, and--
ELIZABETH FARNSWORTH: And they're starting at very high wages, aren't they?
SCOTT McNEALY: Yes. Good engineers are getting well into the six figures now, and huge stock options, and they tend to move every couple of years to another company. So the--people are starting to move offshore to places like India and some of the other geographies around the world, trying to find the good engineers.
ELIZABETH FARNSWORTH: So do you think that the economy is likely to flatten out? Not just because of that but for all the other factors that are at play here.
SCOTT McNEALY: Not for the technology industry. I just see a very, very long run. We're kind of in the Roaring Twenties, if you will, with respect to, you know, where the automobile industry was back in the early part of this century. I think that's where we are in the technology arena. And as the Internet grows, every time the Internet goes to a new place and band width increases, there's a need for more Internet working equipment, more server side technology, and more client side technology, or user side technology. So it's--we're in an up-grade cycle and an expansion cycle internationally that I think will keep the technology sector very strong for at least a couple of decades.
ELIZABETH FARNSWORTH: And that's good for the whole economy because you're so important now in the American economy, right?
SCOTT McNEALY: That is a big part, and I think a lot of people are starting to discover how many jobs are really related directly and indirectly to the technology sector.
ELIZABETH FARNSWORTH: Are you worried about anything right now really specifically?
SCOTT McNEALY: At this stage, you know, consolidation is happening. We ended up with the big three automakers here in the United States, and everybody's trying to figure out if they're going to be one of the big three computer makers when it all sorts out, or however it sorts out in terms of consolidation, so I think everybody is realizing that scale really matters in the hardware part of the business, and with the Internet and Java we're starting to see that good technical skills really matter, and so the author is more in charge than the publisher, if you will, so really good software developers are able to make lots of money on the network without a big company around them, but the hardware business requires lots of skill and capability.
ELIZABETH FARNSWORTH: Barbara Rackes, you're worried about the most recent rise in interest rates and perhaps a future rise in interest rates. You think that's going to slow things down for you?
BARBARA RACKES: I think that we're going to see a slowing down in the second, third, and fourth quarters of this year. But I'd like to touch for just a second, if I may, also on the employment figures.
ELIZABETH FARNSWORTH: Yes.
BARBARA RACKES: Because the retail industry has traditionally employed millions and millions of Americans, particularly at the lower end of the wage spectrum. And I think that as competition increases, the retailer really has three options right now. One is to pay the higher prices in order to compete for the capable employees. And retailers can't pass those prices on to the more savvy consumer of the 90's. The second option is for them to hire less skilled, less poised, less capable employees, and the third option, of course, is for them to reduce potentially the service level by having fewer employees. And the spin I'd like to put on that is a little more positive because I think that retailers are beginning to use technology with greater and greater competence to enhance and increase productivity of that lower number of employees. So you can go into a retail company today and find extremely capable people that are able to access information, whether it's via the Internet or an intranet or just a basic online computer inventory system, that would have taken hundreds of employees in the past. So I think we're combining technology of the future with the service levels of the past to try and combat some of the problems that the retail industry is finding with the change in the employment levels.
ELIZABETH FARNSWORTH: Interesting. Mr. Booth, what do you see ahead? Are you worried about rising interest rates?
RUSSELL BOOTH: Well, the Fed's rise in interest rates just a couple of weeks ago or so did not create a significant problem. But if that were to happen for one or two more quarters, that, of course, would take many people out of the housing market, but, overall, we think that the economy is very stable for this year and should provide near record levels, again, not the same level as of last year, but probably the second all time highest level of existing home sales, second or third highest of on record for new home starts, so overall, we're--we're very encouraged. We also see the technology as having a great effect on the real estate transaction. Our Realtor.com Web site gets about 45/50 million hits per month. And it's affecting how real estate is being sold and technology is affecting real estate, and we see that as one of the things ahead that we're working with, and as an exciting opportunity.
ELIZABETH FARNSWORTH: And, Mr. Batts, just briefly, are you worried about inflationary pressures ahead?
WARREN BATTS: No. I would like to reinforce two of the others. In the technology area I think Scott is on a roll and he's right. Most of us in manufacturing, and I believe retailing also, are investing as fast as we can in those things that will help us improve productivity. We have to do that. The skilled people just aren't out there, and so the capital equipment sector of manufacturing is very strong, both for domestic use and also for export going overseas. The export will be affected by the foreign exchange, but that's true. I--
ELIZABETH FARNSWORTH: I don't interrupt, but be brief, because we've got to go.
WARREN BATTS: Okay.
ELIZABETH FARNSWORTH: Thanks.
WARREN BATTS: I would say the one thing that's very encouraging for manufacturing is that inventories are in extremely good shape, which means that sharp cutbacks to balance inventories are not in the cards this year, I don't believe.
ELIZABETH FARNSWORTH: Okay.
WARREN BATTS: I'd say we're going to have a good year.
ELIZABETH FARNSWORTH: Thank you and thank you all very much for being with us.
JIM LEHRER: Paul Solman is back now with an overview.
PAUL SOLMAN: Well, we're now joined by two economists who use economic data like those we just heard to build a larger picture of the economy, present and future. Sandra Shaber does her forecasting as senior vice president of the WEFA Group in Philadelphia. David Wyss does his as research director at DRI-McGraw-Hill in Boston. And welcome to you both.
Sandra Shaber, what's your reaction to all this fabulous news we've just been hearing from around the country?
SANDRA SHABER, The WEFA Group: (Philadelphia) Well, things are really terrific in most every way. We've got ongoing economic growth, a low unemployment rate, low inflation, high confidence. But there is a fear on the part of the financial markets and at the Federal Reserve that somehow or another the United States is growing too fast; that we're exceeding our potential growth, and all of that is going to cause inflation.
PAUL SOLMAN: But you, in general, agree with the people you've been listening to, that this is--these are true signs they're seeing?
SANDRA SHABER: Well, you know, nothing I suppose is ever a perfect picture. There are, in fact, some signs of some short-term weakness. And it was interesting to hear the previous discussion because I think several people referred to some of these things. For example, we had roaring exports last year, but now the dollar is up. It's appreciated. That reduces the competitiveness of U.S. goods.
PAUL SOLMAN: And that's why? Because--
SANDRA SHABER: And even more than the rise of the dollar, respond to a number of forces, partly because of our ongoing growth, partly because of higher interest rates.
PAUL SOLMAN: But why does it make our exports more difficult?
SANDRA SHABER: Puts higher price tax on U.S. goods, but even more important than a higher price tag, there's a lot of weakness on the part of our trading partners in Europe, Japan, so we've got to ask some questions about whether or not exports can produce another good year this year.
PAUL SOLMAN: Okay. Well, let's get to David Wyss. David Wyss, what were you thinking when you listened to these people talking from around the country and giving these gung-ho stories?
DAVID WYSS, DRI-McGraw Hill: Well, it matches everybody else I'm hearing. Basically, this economy is in great shape, the best shape it's been for 30 years, and really the only problem is we may be doing a little too well for our own good. The Fed's worried that all this good news is just the harbinger of the next round of inflation like it was in the late 60's and the late 80's.
PAUL SOLMAN: Well, let's get to that in a minute, but Ms. Shaber, I'd like to know what numbers you're looking at, to guess, and I realize it's just a guess, as to where the economy is heading. Okay. It's great now, but when you look ahead, what do you look at?
SANDRA SHABER: Well, we should have a year that's round about 2 ½ percent growth for the year as a whole.
PAUL SOLMAN: Excuse me. But we just had a quarter that was 3.8 percent.
SANDRA SHABER: There are some signs, including the militancy of the Federal Reserve, that things will, in fact, go down in the second half of the year. Not only are exports, by the way, a question mark, but also I certainly agree with the previous commentators that the long-term prospects for computers and such is excellent. But, meanwhile, business investment weakened in the fourth quarter, so that's another area, and interest rates will weaken that further. So there are some areas of weakness.
PAUL SOLMAN: Okay. Well, let's leave it there for a second. Mr. Wyss, I once interviewed you, a story about economic forecasting, and we called it crystal ball gazing, you may recall. With that caveat, what are you anticipating for the future of the economy and on what basis?
DAVID WYSS: Well, I do think the economy will slow down in the second half, but, boy, the first half looks awfully strong right now. I think the first quarter could easily match that 3.8 percent we saw in the fourth quarter of the year. And any slowdown is probably going to be late this year, and it's probably only going to be to roughly a trend rate of growth. This is going to be an awful strong year for the economy.
PAUL SOLMAN: Mr. Wyss, a question we've asked before on this program, I think we should get to the stock market here because it's been going down. People still have an awfully tough time with this. Why are these good economic numbers apparently driving down the stock market?
DAVID WYSS: Now, this is always hard to explain why is good news bad news for the stock market besides the usual perverseness of financial investments? The basic point, though, is that good news on the economy is bad news for bond markets. Bond markets, bond yields tend to go up because they see strong economic growth.
PAUL SOLMAN: Explain. When you say bond yields, what are you talking about?
DAVID WYSS: Long-term interest rates will go up because the traders see that the stronger growth, No. 1, increases demand for borrowing money as companies tried to expand capacity.
PAUL SOLMAN: Okay. And as they have more demand for money, then--
DAVID WYSS: And that pushes up interest rates. They're bidding for the same price of interest--for the same money--bids up the price of interest rates.
PAUL SOLMAN: So the price of money?
DAVID WYSS: The price of money. And secondly, of course, it raises the risk of inflation, which makes people more nervous about, of course, putting their money into those bond markets. The long--higher long-term interest rates, in turn, translate into lower stock prices because the investor can put his money safely into bonds at a higher yield, so he demands a higher yield on stocks, which means the lower price of stocks, as a competition to the bond investment.
PAUL SOLMAN: Does this surprise you at all? I mean, do you just say, oh, well, this is the typical economic story, or do you think that perversity or something like it is playing a role?
DAVID WYSS: Well, if you believe that inflation is a risk--and I think it is--then it's not perverse. It really is a rational look at the future. And basically we've had about 75 days at this point, a 7.75 percentage point rise, in long-term interest rates since November. Translate that to the market. It should translate to about a 10 percent drop in stock prices. And we've certainly had that in the NASDAQ. We're getting close to it on the Dow.
PAUL SOLMAN: So Ms. Shaber, is Alan Greenspan doing the right thing, as David Wyss seems to be suggesting?
SANDRA SHABER: Well, the prevailing view is that the U.S. economy can only grow so fast without heating up inflation. There are some ideas in the air now about the effect of the global economy, the effect of all kinds of changes here at home, that might push inflation out a little bit further than what we're used to.
PAUL SOLMAN: What do you mean by push it out further than we're used to?
SANDRA SHABER: We might be able to run longer and stronger in terms of economic growth and not invite the kind of inflation that people at one time expected. But none of this is certain.
PAUL SOLMAN: Mr. Wyss, I'd like to read something from the "Wall Street Journal" today, editorial, said, "A broad swathe of the investor world, including the little guy, is yelling at Chairman Greenspan," and presumably for attacking the market with all his talk of irrational exuberance. Are people being unfair by blaming him, Mr. Wyss?
DAVID WYSS: I think people are being unfair because he's doing exactly what the Fed should be going, taking away the punch bowl when the party gets going. That's never a popular step, but if you look at the history, this is the third longest expansion in post-war history. His record right now as a manager of the economy has got to be in (a) if you look at how the previous expansions died, the 60's and the 80's, the two longest expansions, they died precisely because the Fed took the punch bowl away too late; they let inflation get going. Eventually, they had to raise interest rates and choke off growth.
PAUL SOLMAN: Well, I was going to ask one last question, which--are economists beginning to change their minds about inflation, as Ms. Shaber seems to suggest?
DAVID WYSS: Well, we're certainly lowering our estimates. One problem, I can remember doing the same thing in the late 1980's, and I can remember other economists doing in the late 1960's, it's always a disease of economists, we tend to interpret the economy by projecting where we are now forever, and the history of this suggests it takes a while for inflation to build. We may just be seeing the natural lags in the process, not a sea change in how the economy operates.
PAUL SOLMAN: Okay. Well, thanks both very much.