GOOD NEWS, BAD NEWS
MAY 3, 1996
The economy is doing better and the US is close to full employment. That's the good news. The bad news is there's a significant risk that inflation will be higher this year - and possibly higher again next year - and that bothers the financial markets. Margaret Warner talks with four business experts from around the country about the economy's ups and downs.
MARGARET WARNER: The news today, another drop in the unemployment rate and a robust increase in personal income. The news yesterday, higher than expected first quarter growth. What are these and other indicators telling us about the state of the American economy? We get four perspectives. Allen Sinai is chief global economist with the investment firm Lehman Brothers. Sandra Shaber is an economist with the Wefa Group, an economic forecasting and consulting firm in Philadelphia. Barbara Grogan is president of Western Industrial Contractors, a construction and consulting firm based in Denver, and Barbara Rackes is president of Rackes Direct, a custom apparel company that sells by catalogue and over the Internet.
She's based in Columbia, South Carolina. Welcome, all of you. Allen Sinai, let's start with you with the new numbers that came out today on unemployment and the wage picture, that is unemployment is down again. Yet, personal income has risen comfortably. What do those two figures tell us about the state of the economy right now?
ALLEN SINAI, Lehman Brothers: (Boston) Well, the economy is improving this year. It's picking up in momentum. It's a renewed expansion. It's being led by the consumer. There are enough jobs, enough income to generate spending. It looks sustained. It's really a pretty good picture. And the small, non-perm payroll jobs number today, the 2,000, was that way because of some special technical factors, we call them seasonal factors, they depress the numbers, and it should be dismissed pretty much as an apparition.
MARGARET WARNER: So you're saying that job creation really is proceeding at a, at a healthy clip?
MR. SINAI: It's 160,000 per month so far this year. That's above trend. It's very good for the sixth year of a business expansion, and on the other basis, the one on which the unemployment rate is calculated, 5.4 percent unemployment rate, and about a million one people having found work so far this year is really quite an outstanding picture.
MARGARET WARNER: Now, what about the wage picture? We've heard a lot of talk this year about wage stagnation, yet, wages or personal income is up. What's driving that?
MR. SINAI: Well, that's changing. The labor market is tighter. A 5.4 percent unemployment rate tells us this. And wages in all of the ways that they're measured do show some tilting up, some improvement. I think American workers aren't going to feel so badly as the months go by this year and more jobs are available, and they have a little bargaining power. It's generating income and, you know, we're consumers. We like to spend the income we get. We spend 80 cents of any dollar we get in a given year, and that is what is propelling the economy higher.
MARGARET WARNER: Mmm-hmm. Sandra Shaber, turning to you and to the companies that your firm advises, what is the employment and the wage structure picture in the companies you're advising?
SANDRA SHABER, WEFA Group: (Philadelphia) Well, I think everybody is breathing a sigh of relief. It wasn't too long ago where we thought we really were in a recession, but how that news is perceived by many different kind of businesses is quite varied.
Retailing, for example, is such a mixed picture. Consumers are spending more. In total, they're spending a fair amount of money, certainly whatever their paychecks generate, yet there are so many stores and so many malls that when you pick up the paper it's almost a bankruptcy a day.
MARGARET WARNER: But, let me--I want to get to the growth in a minute, but let me just ask first of all about employment and wages. Are the companies you're advising, some of these big retail chains, are they having to pay people more?
MS. SHABER: There are some wage pressures. It really depends on where they are. Certainly retailing is stronger in some parts of the country and in some segments. And so there is some employment growth. But there is a lot of competition in that job market. Wages are growing, but on a per-worker basis, wages in general are just barely ahead of inflation.
MARGARET WARNER: Barbara Grogan, in the contracting and construction business, what are you seeing in terms of the labor market, the labor situation?
BARBARA GROGAN. Western Industrial Contractors, Inc.: (Denver) Well, Margaret, we work all over the country, so it really depends on which market we're in. There are some markets that are much tighter. We're seeing a real strengthening in the California market, for example. It was pretty weak for a long time. In Denver, in Colorado, the market is much softer because of the anomalous situation with Denver International, pouring $4 billion into a pretty small construction market, so in Colorado, you're seeing--
MARGARET WARNER: Explain that. You mean now that that construction is over?
MS. GROGAN: Exactly. Construction ended. It was more than $4 billion in a, in a pretty small state, in a pretty small construction market, so in Colorado, it's sort of soft, but in the other regions of the South, Southwest, the Northwest, we're seeing a real strengthening, and competition for good employees is getting tougher.
MARGARET WARNER: And, Barbara Rackes, now you just changed your business so that you've actually reduced the number of people that you employ. Tell us about that.
BARBARA RACKES, Rackes Direct: (Columbia, SC) Well, over the past five years there's been major changes in consumer spending patterns. And like a traditional retailer, we served geographically delineated marketplaces. We started to see that as the consumer became--
MARGARET WARNER: You had stores, is that right? You had regular--
MS. RACKES: Stores, traditional stores, what I call brick and mortar. And we found that as consumers were, uh, going into a more casual marketplace, as they were spending more money on how they lived rather than what they wore, uh, that we were having to reach out further to reach our target market.
We also found that people wanted to have the everyday low prices of a Walmart but they wanted to have the high level of service that they got in a specialty operation. The customer came in and she said, I want that blue dress but I want it with a V-neck and a long sleeve and so on, et cetera, et cetera.
And we decided that what we wanted to do was to go into the custom business where we could accommodate all of the needs of that very specialized customer. See, as I see it over the next couple of years, we're going to see really two segments of the marketplace. There's going to be the very large superstore retailer that meets the average needs of every consumer, and then there's going to be the specialty retailer that provides the unique things that are not otherwise available.
MARGARET WARNER: And so you--
MS. RACKES: We made a choice to go into that market.
MARGARET WARNER: I see. And you're able to do this really just, people just order by fax and modem and phone.
MS. RACKES: Absolutely.
MARGARET WARNER: Is that right?
MS. RACKES: We now serve a slice of the world, rather than a geographically-delineated marketplace. In fact, our first order came from Japan.
MARGARET WARNER: I see. Sandra Shaber, is this the kind of--are we seeing this all over the country in different markets, change in the employment picture?
MS. SHABER: There are certainly--first of all, I want to agree that there are great differences from one region to another. But there are also great differences from one segment of retailing to another. The part that's growing, the two parts actually that are growing and adding people and selling more are the big discounters and some of the department, many of the department stores and also some very specialized kinds of retailers who really can find a way to bring customers in the door in a very, very crowded market, but major differences from one segment to another.
MARGARET WARNER: Allen Sinai, let's turn now to the new growth figures from yesterday, the 2.8 percent growth. What was--what are the major factors fueling that? We've talked about consumer spending. Was that one of them? Were there others?
MR. SINAI: Consumer spending was the largest and it was across-the-board in all categories. Also, we had a big increase in equipment spending and some in plant. That's business investment, business still investing heavily, and housing and construction went up. But later on, as we moved through the year, because many of our trading partners are starting to do a lot better this year, we, we think exports will be very strong, and that will carry our economy.
MARGARET WARNER: And what were the businesses investing in predominantly?
MR. SINAI: Well, it's mainly computer and software and information processing and communications equipment, kind of the same old thing, pretty big spending on that. That was a surprise, because we've had such a boom in those areas of capital spending for the last two or three years, it seemed to continue in the first quarter.
MARGARET WARNER: And, Sandra Shaber, are the businesses that you're advising and consulting with, are they investing in computers?
MS. SHABER: Absolutely. Information technology is such an important part of retailing and such a success factor in retailing, much of the pressure now is to cut costs. As we've heard consumers aren't willing to pay more, and so the retailers must cut costs to offer attractive prices. And much of that cost-cutting has to do with new uses of information and the use of computers to distribute information, to control inventories, to order, and to get through to the customer also.
MARGARET WARNER: Barbara Grogan, what's the business investment picture in the construction and contracting business?
MS. GROGAN: Well, I've always felt like my company was sort of a funny little economic bellwether because for us to be working, businesses have to be making capital investments, and, therefore, they have to be bullish about the future. Umm, so--v
MARGARET WARNER: You mean otherwise they wouldn't build?
MS. GROGAN: Exactly. That's why they wouldn't expand, they wouldn't change their product line, they wouldn't be making the enormous capital investments that are involved that we're involved with, so what we're seeing is a pretty strong around the nation investment, and in terms of employment, I was with an architectural and engineering firm yesterday in Chicago, a very large one, who is doing more work this year with two thirds of the personnel because of an investment in technology that they made over the last two years. I thought that was a pretty staggering number.
MARGARET WARNER: Allen Sinai, is this--this anecdote we just heard and also Barbara Rackes' example, is this why you think people still feel some economic insecurity, even though new jobs are being created all the time?
MR. SINAI: Well, yes, it's a very different kind of labor market, and businesses are run quite differently, and we do have technology to displace us, and a lot of competition, a lot of new people come into the labor force who are highly skilled, and often will start at lower salaries, so we have a lot of job insecurity, and I think it's that, as well as the fact that we're all working so hard to earn the money we earn to buy what we want to buy. I've never seen anything quite like it. Now, that's the flip side of the productivity, the fact that we're working hard and as a nation, we're more competitive than we've ever been, but it's hard work, and people wonder why they're spending that much time doing that and what they're getting for it, but, you know, on the economics, in the income growth and what we're spending and what the consumption statistics show and even the job generation, it's hard to find anything really wrong economically. I think it's how we feel, not necessarily how much we're earning and how much we're spending.
MARGARET WARNER: Barbara Rackes, what are you seeing in terms of consumer spending patterns, willingness of consumers to spend a lot, and a related question, in terms of the growth, did you invest a lot in computers in order to change your business?
MS. RACKES: Uh, dealing with the first, uh, issue first, uh, it sounds a little boring but I think that the consumer is cautiously optimistic, and I feel like I've been saying that for at least the last 12 months, but I do feel that the consumer now sees the economy as being much more stable than it has been, and is willing to, umm, spend on the things that they really want. We're in an economy these days where once we felt like we needed a lot of things, and today we've learned that we can live without a lot of things. So we, we wait until we find exactly what it is that we want at the price that we want, and then once we've found all of those things, we're very willing to make the investment in, in doing so. Uh, in terms of South Carolina, in terms of the kind of investment that, that we've made in our, our particular field, probably 60 percent of the total capitalization of our company has gone into technology of one kind or another, whether it's technology training, the development of our Internet site, the computers that we use in order to work 24 hours a day in spite of the fact that we, as human beings, are not working 24 hours a day.
MARGARET WARNER: But people can call you 24 hours a day.
MS. RACKES: People can call us 24 hours a day. They can e-mail us 24 hours a day. They can, umm, make a very personalized order at 3 o'clock in the morning, and I can be sound asleep in my bed. I think that is one of the greatest advantages of making the investment in technology because humans can then invest in their own personal lifestyles a little, a little more qualitatively.
MARGARET WARNER: Mr. Sinai, to put all of this together that we've just talked about tonight, how much, if any, of a risk of inflation does this pose, does this good news pose, do you think?
MR. SINAI: Well, you know, the economy is doing better. We are close to full employment in the labor market. There are some increasing wages. There is risk that inflation will be higher, probably will be higher this year than last year and perhaps a little higher next year, and that is what's been bothering our financial markets because when that happens, interest rates rise, and higher interest rates hurt stocks. Then you have the rate picture against the earnings picture and the tug of war in the stock market. I think though, by and large, it's the cost of more jobs and a better feeling for most Americans in terms of their job outlook and how they live, how they work, that is brighter. A little bit of extra inflation I think we could live with.
MARGARET WARNER: Sandra Shaber, how do you see the inflation prospects?
MS. SHABER: There are some underlying forces now which are keeping a lid on prices. The things that we're seeing right now, a spurt in gasoline prices, and some potential increases in grain prices, those are very temporary factors. They're not part of a long run. Over the long run, I think the global economy and all of this competition that we have are, indeed, keeping a lid on prices, and that's very good for all of us consumers and workers alike.
MARGARET WARNER: Well, thank you very much. Thank you all four of you.