SURGING AHEAD

November 26, 1999
		After a background report, Paul Solman of WGBH-Boston and four regional economic experts discuss America's continuing economic boom and its future growth potential.

Nov. 26, 1999: A backgrounder on America's surging economy Nov. 16, 1999: Economist analyze the latest hike in interest rates. Nov. 5, 1999: Economist discuss the unemployment rate and its influence on the stock market Oct. 15, 1999: The volatile Dow Jones average and its effect on the economy Sept. 27, 1999: The winning and losing of day trading Sept. 6, 1999: Overworked America? Sept. 3, 1999: Experts discuss the current wage gap between workers and CEOs July 2, 1999: Economics experts discuss jobs in the United State March 5, 1999: A look at the U.S. economy's steady growth. Browse the NewsHour's coverage of Economy and Business indexes     Federal Reserve US Treasury Department International Monetary Fund	PAUL SOLMAN: To get down to further specifics, make some broader generalizations and see how the economy is faring across the country, we're now joined by Daniel Mitchell, a professor at the Anderson School of Management at UCLA; he's director of the school's forecasting project. Rae Rosen is a senior economist and officer at the Federal Reserve Bank of New York. Morton Marcus is director of the Indiana Business Research Center and economist at the Kelly School of Business at Indiana University. And Gary Shoesmith is director of the Center for Economic Studies at Wake Forest University. Welcome to you all. Let's start with a quick survey. What's happening in your region, Morton Marcus? What's selling in the Midwest and who's buying?
	Regional perspectives
	MORTON MARCUS, Indiana University: Well, our concern has to be with manufacturing across the country. The figures that you've cited neglect the fact that there's been a decline in the rate of growth of motor vehicles and parts, which are very important to Michigan and Indiana and Ohio. We're concerned about the fact that residential investment is down in the third quarter from where it had been. We're concerned about the fact that the October figures that came out show that durable goods purchases are down and after considerable increases last year, and gas, oil, and petroleum purchases are up, largely because of price increases. PAUL SOLMAN: So you're a little bit worried, I take it? MORTON MARCUS: I think we have to be concerned about - there's a lot of good news in the economy but in critical sectors of the economy - automobiles and housing - there is reason to be concerned. PAUL SOLMAN: Gary Shoesmith, you're in the South. What's happening there? Do you have the same kinds of concerns? GARY SHOESMITH, Wake Forest University: No. The picture is really quite different here. Southeast economy is still very robust, both in terms of employment growth and income growth. The Southeast is still leading the nation as a whole. Unemployment is roughly ½ percent lower than the national average. We have some very strong states that lead the way, Florida and Georgia, and after that, South Carolina to a lesser degree, North Carolina and Tennessee. So we have a pretty, pretty strong engine down here. And of course in Florida it's tourism, but a lot of people don't realize that Florida is roughly 1/3 of the Southeast economy both in terms of the overall level of employment and also in terms of growth. In fact it's driving this part of the country. PAUL SOLMAN: Daniel Mitchell, the far West, what's happening out there? DANIEL MITCHELL, UCLA: Well, we do have some decline in manufacturing. We're still suffering from the end of the Cold War and the decline in aerospace and all of that. But here in California, for example, the construction industry is booming. We have this very large business services sector, which includes everything from janitorial services to computer consultants and so on. That's been booming along. A number of areas of retail have been doing very well. So overall it's a very positive picture. PAUL SOLMAN: Rae Rosen finally, Northeast, what's going on in New York, New Jersey, where I am? RAE ROSEN, Federal Reserve Bank of New York: The entire Northeast? Let's take it up to Vermont and New Hampshire. PAUL SOLMAN: Yeah, that would be fine. I'm right in there. RAE ROSEN: We've got a vibrant economy and it's being driven by what's happening on Wall Street in New York City. If you think of New York City as a state-sized economy, it would be the third largest in the Northeast, and the employment growth is running close to 2.5 percent. It's fantastic. It's being driven by business and financial services and those are the kind of services that are driving job growth right across the Northeast.
	Fed reaction in a global economy
	PAUL SOLMAN: You're not worried when you hear Morton Marcus talk? Nothing like that happening in the Northeast, as far as you can see? RAE ROSEN: Well, he's worried about manufacturing. And out here manufacturing is certainly declining. It's declined since World War II because it can't compete with the jobs and the production that we get from business and financial services. So we're really shoving it out the door to make way for new growth. If you go up the West side of New York City along the Manhattan sideline there, you see dot.com after dot.com being established and they're driving out what used to be meat processing plants. That's a good replacement, as far as I'm concerned. PAUL SOLMAN: Gary Shoesmith the Federal Reserve raising rates now for the third time, why hasn't that dampened -- seemingly hasn't dampened, slowed down the economy? GARY SHOESMITH: Well, it shouldn't be too surprising really. All the Fed has done so far is to retrace its steps since the Asian crisis hit in late 1997, so we're really just back to square one as far as interest rates. PAUL SOLMAN: You mean that they had lowered rates three times, now it raised them three times? GARY SHOESMITH: Yes. The Fed had lowered rates to try and boost equity markets to allow foreign countries to lower their interest rates to help recover, just a number of reasons why the Fed was inclined to lower interest rates during the Asian crisis and now we're retracing those steps. And frankly, I don't think it's enough so far to slow consumption, enough to slow the economy to somewhere around 3 percent, which is at least the stated objective or desire of the Federal Reserve right now. PAUL SOLMAN: Morton Marcus, what's the role of savings and debt in all this? We read about a savings rate of 0, for example, and yet... I mean not and yet. Is that what's driving this? MORTON MARCUS: Well, very clearly consumers are spending a great deal of money on debt. We now have consumers spending 3 percent of all of their purchases, all of their outlays on interest. Interest payments have risen twice as fast as spending in general by consumers, and if we have still more increases in interest rates, we're likely to see them hit consumer durable goods across the country, which does have its effect very seriously on the Midwest, where we produce the washing machines and the dryers and the automobiles and refrigerators and the goods that go into homes and into their garages.
	Technology a driving force
	PAUL SOLMAN: You said at some point that you thought this was a problematic scenario. I was wondering if you think this has been a year of living dangerously. MORTON MARCUS: I think we've been pushing it very hard. I don't know how many more SUV'S we can really put onto the road in America. We don't have enough gravel roads to handle all of them. PAUL SOLMAN: Daniel Mitchell, do you agree? Do you think that there is a sense in which we might be living, as Morton Marcus suggests, beyond our means here and that we'll come a cropper? DANIEL MITCHELL: Well, the stock market has clearly been a driver for the consumer, both directly for those people who have stock and feel a lot wealthier, and for the many people who have gotten jobs and more overtime hours and all of that indirectly. So if we were to have a break in the stock market, and particularly if it was a severe and sustained break, not just the kind of blip down and up that we had about a year and a half ago, that would clearly impact negatively on consumer spending and have a general negative effect on the economy. On the other hand, we have to weigh the whole technology growth and that's been very, very strong. The dot.coms that were talked about in New York, or certainly out here in California and the West Coast, and it's really kind of industrial revolution of a new kind. PAUL SOLMAN: Rae Rosen, should the Fed -- you're on the Fed, after all, you work for the Fed-- should the Fed be thinking about the stock market? I remember Alan Greenspan warning about irrational exuberance, seemed to be thinking about it, then, the Dow Jones was at about 6500 at the time. He certainly didn't talk it down, as the phrase was at that time. RAE ROSEN: Speaking for myself, not for the Fed, which is what we're asked to do if we get a question like this, of course anybody would be worried about a bubble economy, comparable to what happened in Japan. But I think what you've seen for the past year that the market has trended more sideways. As interest rates have risen, we've seen the impact already. We've seen a slight encroachment in housing starts. They've begun to taper off. We've seen a taper off in applications for new mortgages. And that's the type of slowdown we'd like to see. We're not trying to bring the economy to a halt. What we'd like to see is a deceleration, something akin to when you drive the car at 65 miles an hour and we'd like to slow it to 40.
	Living beyond our means?
	PAUL SOLMAN: Is there anybody here who worries about the stock market really being overheated in a significant and a significant fall occurring as a result? Morton Marcus, you've been the most negative of our panelists so far. MORTON MARCUS: I don't mean to be negative. After all, we do have the Indianapolis Colts, which is a very positive factor here in the Midwest. PAUL SOLMAN: That's an extremely obscure reference. Would you like to explain that very briefly? MORTON MARCUS: Well, we're 8-2 and many of the other teams can't match that kind of record, teams that get on Monday Night Football. PAUL SOLMAN: This is the national football league, right. MORTON MARCUS: Yes. I didn't realize the Colts were that obscure. You ought to get out of the East Coast sometime. The stock market concern that I have is that non-financial corporations have seen a decline in their profits in the most recent quarter. Manufacturing firms in 1998 had a 17 percent decline in their profits, and I'm not sure how many of the dot.com companies are actually showing profits. We seem to have a great deal of speculation that isn't based on solid fundamentals. PAUL SOLMAN: Gary Shoesmith, Wake Forest doesn't have an NFL team, so what about the stock market for from your point of view? GARY SHOESMITH: We are going to... we think the Aloha Bowl, that's a pretty good accomplishment for Wake Forest University, so be looking for that on Christmas Day. No. Just about everyone would agree that if you went stock by stock, most stocks appear to be overvalued based on projected earnings and discount rates and so forth. But you know, as long as the baby-boomers keep dropping $20 billion a month into the stock market through payroll deduction, I think there's going to be this upward bias in equity prices. It looks like it could be a bubble. If it were to fall apart, where would all those funds go? You know, of course a lot of it has to do with the flow of funds across borders, as well, but the United States will be a good place to invest over the long term. So even if the market comes down, as one person was mentioning, I don't think it'll be for a long time. And so we'll be back up. So far, the fed, through Alan Greenspan has tried to talk the market down somewhat, but you know, that's never going to have a long-lasting effect. So I think the stock market is in good shape still.
	The outlook for the future
	PAUL SOLMAN: Rae Rosen, what about inflation? We've talked about the cloud of inflation on the introductory piece. Yes, no? RAE ROSEN: Well, the real worry about inflation really relates to wages. Every one of us has talked about how unemployment rates have come down and more and more people are employed, or if you look at population ratios, we're employing a much greater percentage of our population. We've pulled more people into the labor force from the unemployed and from minorities who never had a chance to work before. At some point, wages are going to have to rise. And we know from all the research that's been done on interest rates that there's a variable and fairly long lead time between raising rates and slowing the economy. PAUL SOLMAN: But we've been hearing that on this show now, I should tell you and you probably know, for years, that this is right around the corner. And I mean years, that inflation, the labor markets will tighten, inflation will go up. I must have... Martin Feldstein must have told me that on this show, in this very studio, about four years ago. RAE ROSEN: Well, technology has led to some improvements in productivity that nobody really believed were going to be sustainable. And yet now everybody's buying into that argument. We've got productivity gains where we think we've changed the growth rate, and we might be a little bit back closer to where we were in the 50's in terms of producing such sustainable rates of growth. That would mean that we could have a slightly faster rate of growth in the economy. But at some point-- and I'm not saying this year or next year-- we will run out of bodies to fuel the kind of growth we're going to generate in the third quarter of this year. So we're not saying stop the economy; we're saying slow the growth a little bit to be compatible with what our true capacity is. PAUL SOLMAN: So your worst-case scenario is a little bit... we could go … faster growth but a little bit of inflation. Just quickly around last the last few seconds, Morton Marcus, your worst-case scenario? MORTON MARCUS: That we have continued increases in petroleum prices and that it affects the economy, as it did in 1973 and again in 1979. PAUL SOLMAN: And then you have a downward spiral as a result? MORTON MARCUS: That's right. PAUL SOLMAN: Daniel Mitchell? DANIEL MITCHELL: I think the recovery in the world economy, the Asian economy, the European economies, that growth could put pressure on not only oil prices but all kinds of prices that could feed into inflation at home. PAUL SOLMAN: And finally, Gary Shoesmith? GARY SHOESMITH: Yes, I think we're having increased pricing pressure coming both the demand side from consumers and also from the supply side on the part of wages. The real key there is productivity growth, as has already been mentioned. But for next year, I think we're going to see higher inflation and higher interest rates, but not by more than 0.5 percent. PAUL SOLMAN: Okay. Well, thank you all very much and Morton Marcus, good luck with the Colts, even though I'm a Patriots fan.

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