That is the consensus of 55 corporate, academic and financial economists
participating in the latest semiannual Wall Street Journal economic
forecasting survey. If the economists are correct, it means that the
expansion that began in April 1991 will have lasted for more than seven
years, the second-longest period of nonstop economic growth in this
century. The longest, of 106 months in the 1960s, will be surpassed if the
current expansion extends into January 2000.
The economists see short-term and long-term
interest rates staying at roughly current levels
throughout the year, unemployment remaining
below 5% of the work force and inflation
inching up only slightly from currently low
levels. The consumer price index, the nation's most widely used measure of
inflation, rose less than 2% for the first 11 months of 1997.
The economy, as a result, will grow at a 2.4% clip in the first half and
in the second half, the economists say. That would be below 1997's growth
rate, which is expected to be about 3.7% when the final numbers are tallied.
But last year was exceptional -- the best since 1988.
Indeed, it caught most economists by surprise as they are accustomed to
seeing business expansions lose momentum as pent-up demand for
computers, cars and new homes becomes satisfied.
But only one economist in the survey -- David Bostian of Herzog, Heine
Geduld Inc. -- is even hinting at a recession this year, largely because the
majority of them expect the Federal Reserve either to lower interest rates or
leave well enough alone. Plus, there is a dynamism to the American
economy that is unmatched elsewhere in the world.
"As we exit 1997, the economy really has a lot of forward momentum," said
Prudential Securities Inc.'s chief economist, Richard Rippe. He and other
economists note that although the Christmas selling season wasn't as strong
as retailers had hoped, consumer spending will get an extra boost this year
from rising wages and low inflation. And they see companies continuing to
invest heavily in new computers and machines to become more efficient and
reduce their dependence on a tight labor market.
While many emerging economies lose their momentum and established ones
struggle to get back on track, "The U.S. will be the locomotive for the world
in 1998," said James F. Smith of the Kenan-Flagler Business School of the
University of North Carolina. He is predicting strong economic growth of
2.9% in the first half and 3% in the second half, a more bullish growth
forecast than that of most other economists in the survey.
Mr. Smith believes interest rates will decline and, thanks to continued
in efficiency on the production lines of American businesses, inflation will
remain below 2%. With low inflation rates and faster wage growth,
workers have more buying power. Mr. Smith was the only forecaster in the
June 1997 survey to correctly predict that the yield on the 30-year Treasury
bond would end the year below 6%. (It was 5.92% on Dec. 31.) He is now
forecasting a long-bond rate of 5.45% on June 30 and 4.85% at year end.
The wild cards among the factors influencing the economists' forecasts
inflation and the Asian financial and economic turmoil. If inflation moves
ahead faster than expected because wages are rising in a market where
unemployment has reached a 27-year low, the Fed is more likely to raise
interest rates. Although a rate rise isn't expected by the majority of
economists, it is significant that 18 of the 55 economists do expect at least
one such increase. Sung Won Sohn of Norwest Bank in Minneapolis fears
the Fed will overreact and raise rates twice in the first half of the year.
Most economists see inflation creeping up this year from the very low rates
hit in 1997. November's consumer price inflation rate was only 1.8% and
for the year it is expected to be about 1.9%, which would be the lowest
since the mid-1960s -- except when the consumer price index plummeted in
1986 due to the collapse of oil prices.
Even so, the economists believe that many companies will be raising prices,
particularly in the service sector, to offset higher wages they have to pay to
attract and keep workers. By midyear the annual inflation rate will be
2.1%, the economists believe, rising to 2.3% by year end. Holding down the
inflation rate by about two tenths of a percentage point will be revisions this
year to the way the government measures inflation, notes William Dudley,
chief economist of Goldman, Sachs & Co. He now expects the CPI to be
1.9% at midyear and 2.1% in December.
The other question mark is the Asian financial turmoil. It could crimp
economic growth but not at this point in a major way, most of the
forecasters say. In part that is because there are both negative and positive
ways to assess the impact. On one hand, the more-expensive dollar means
there will be less demand for U.S. goods in Asia, which could reduce profits
of many multinational companies banking on strong growth from that area
of the world. That, in turn, could hurt the stock market, taking away some of
consumers' sense of well being.
Concern Over Asia
As David Wyss, chief economist of DRI McGraw Hill sees it, "This is a
red-hot economy that is getting a bucket of ice water thrown on it by the
Asian crisis. A lot can still go wrong. Every time you turn around it seems
something else in Asia is going bad." He currently has a 1.6% U.S.
economic growth forecast for the first half of this year, one of the lowest
among the economists.
At the same time, however, foreign goods will be more competition for U.S.
products, thus keeping inflation low and the Fed less likely to raise interest
rates. (Higher interest rates, usually imposed when inflation is getting too
high, would serve to curb economic growth and drive prices down.) Mr.
Rippe notes that Asia now is one side of an inflationary "tug of war" that has
tight labor markets and full usage of production capacity on the other side.
He says his CPI forecast of a 2.4% annual rate would be higher if not for
the Asian impact on inflation.
The impact on U.S. financial markets of the Asian crisis may be even more
pronounced, some economists argue. It has added a new swing factor to
corporate profits that drive the stock market and has made the U.S.
Treasury bond market more of a haven.
Taking Asia into account with other economic forces, the economists by
slim margin (28 to 25) expect bonds to outperform stocks in U.S. financial
markets this year. But despite the turmoil in Asia, 18 economists expect
stocks in that region, excluding Japan, to be the best-performing equity
market in the world this year. Fifteen economists chose the combined
developed countries of U.S., Europe and Japanese markets and 10
economists favored Latin America.
The best-performing bond markets will be in the developed world (26)
followed by Asia, excluding Japan, (18) and Latin America (10), the
"The challenge for the U.S. equity market will be the squeeze on corporate
profits," said Richard Berner, chief economist of Mellon Bank. He expects
there will be "some corrections, but not major ones," in U.S. stocks this year,
which is one reason he favors the bond market. For the time being, he says
he would advise stock investors to favor Europe and Latin America while
"maintaining some core holdings in the U.S." But as the picture becomes
clearer on Asian economies, he says he would look for opportunities to
move money into those beaten-down stock markets.
On other questions the survey respondents said:
The yen/dollar exchange rate will be 130 at midyear and 126 at year
end. On Dec. 31 it was 130.57.
The mark/dollar exchange rate will be 1.76 at midyear and 1.72 at
year end. On Dec. 31 it was 1.7980.
The fastest economic growth region outside the U.S. this year will
be Latin America, said 31 of the economists. Continental Europe was
next (17) and Asia, excluding Japan, was a distant third (2).
The fastest-growing large country outside the U.S. will be China (17),
followed by Canada (14), Mexico (6), the U.K. (5) and Germany (4).
Fixing the world's computers to register the year 2000 date will be
accomplished on time, said 46 of the economists. Of the seven who
foresee that not happening on time, six believe it will result in a
"serious" U.S. economic problem.
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