Economics Update (January-March 1997)

Prospects for Job and Income Growth
Remain Strong for '97

Editor's Note: This article is excerpted from a speech Atlanta Fed President Jack Guynn gave to the Atlanta Rotary Club earlier this year. Guynn shares his outlook for the U.S. economy and discusses a short list of public policy issues that he believes are particularly important.

M ost of us are going into the new year with great expectations—and for good reason. The economy performed very well last year. All of the official figures for 1996 are not in yet, but it looks like the economy grew at an annual average of around 2 1/2 percent, with unemployment at about 5 1/2 percent on an annual average basis. That's as low as unemployment has been since 1989. Inflation held at around 3 percent. We're now into the seventh year of this economic expansion—only the third time in the last 50 years that we've had such a long period of sustained growth.

It's critical to fight any tendency toward complacency about this nation's economic performance, however. Those who understand good public policy and have long memories should realize how important it is to retain the gains we've made against inflation and to make further progress on deficit reduction.

The National Outlook for 1997

It looks like 1997 will be another year of moderate growth—somewhere between 2 and 2 1/2 percent—perhaps somewhat slower than last year. Unemployment will probably continue near the low level of 5 1/2 percent we've seen over the last two years. Inflation, as measured by the consumer price index (CPI), should remain at its current 3 percent level.

Of course, no one can predict what kinds of momentous and unexpected things might happen to change the economic outlook—either for better or for worse. Barring any external shocks, consumers seem ready to lead the way again—though not quite as vigorously as last year—particularly in the areas of autos and other durable goods. Part of the reason for this ongoing strength is that prospects for job and income growth remain positive.

Jack Guynn
Jack Guynn, president and CEO of the Atlanta Fed
Housing will probably slow somewhat, mainly because most of the pent-up demand has been met but also because of demographic constraints. There simply aren't as many new families out there looking for apartments and houses as there were in the 1970s and early 1980s.

Overall, business spending promises to be a source of strength in the economy again this year, albeit one that has been slowing down from its high point in 1994 of nearly 10 percent year-over-year growth. Businesses appear likely to keep spending on equipment, as it is now clear that re-engineering and investment in productivity-enhancing equipment were not just short-term phenomena.

Government spending should remain flat overall, as moderate declines at the federal level—prompted by additional and much-needed efforts to rein in the nation's budget deficits—should be offset by moderate growth at the state and local levels. Demand from abroad is not likely to change dramatically, given that the prospects for economic growth of our major trading partners remain only moderate.

What Could Go Wrong?

Not since the 1950s and '60s has there been a similar period of relatively low and steady unemployment and inflation rates. So what could go wrong? Since we have such a well-balanced economy now, the good news is that there's simply less to worry about than usual.

I cannot think of a better time in our economic history for contemplating, discussing, and debating how we, as a nation, feel about inflation.
First, continued tightness in labor markets is a real concern for both business people and policy makers. With job growth running well ahead of labor force growth, it's getting tougher to find—and retain—skilled, qualified workers. Pockets of tightness in the Southeast have included construction and retailing, as well as certain skills like automation and welding. Labor markets, I think, are at least a question mark.

A second area is consumer spending. It's always a critical factor since it makes up two-thirds of our economy. Although job growth, income growth, and consumer confidence are at levels that should continue to support a healthy level of spending, growing degrees of consumer indebtedness may begin to dampen expenditures.

Avoiding Complacency

Beyond these two specific items, I'm worried about something even more fundamental: that is, that the long string of good economic years—with no end yet in sight to this current expansion—has brought on a certain complacency in our nation toward all things economic, particularly toward inflation and deficit reduction.

This complacency could divert our focus away from what should be our No. 1 concern: holding onto gains we've made in regard to price stability. Whereas not too many years ago inflation was at the top of many business people's worry list, surveys in the last year have shown that inflation is no longer even in the top five of most business people's concerns. Whether we've allowed ourselves to get complacent or simply have short memories, we could lose the progress we've made against inflation if we don't maintain, and even expand, the public mandate to hold the line.

What the Federal Reserve is best at doing is providing an economic environment of stable prices in which people can make their own choices about what's best for their economic well-being. And so the Fed's paramount concern in recent years has been to keep inflation low and steady—so that individuals, businesses, and governments can make their decisions, free from concerns about whether the price level is going to change significantly. Now that the inflation rate has remained around 3 percent or less for five years, the next question becomes, Would an even lower rate of inflation optimize economic performance?

Of course, if we want to maintain the current rate of inflation, then the Fed's current stance is probably appropriate under prevailing conditions. However, if we want to make further progress on inflation, then we need to be looking for opportunities over time to nudge the rate still lower. Some suggest that we should work toward a goal of zero inflation. Although there's certainly less agreement in general about the costs and benefits of going to zero inflation, we should continue to study and debate that as well.

I cannot think of a better time in our economic history for contemplating, discussing, and debating how we, as a nation, feel about inflation.

Another important economic public policy issue is deficit reduction. And without strong leadership to bring down the overall federal deficit even further and to work on chipping away at the national debt, no matter how good monetary policy is, it simply can't do the entire job.

The deficit problem in some ways is worse than current numbers indicate. We've all read how the Social Security Trust Fund is projected to go from a surplus that is being used to offset the federal deficit to insolvency over the next generation. The Medicare program will be in big trouble much sooner. We've got to fix these problems—either on the benefits side or the tax side. If we don't follow through on a balanced budget plan, government reports show that entitlement and discretionary programs could add nearly $700 billion to the national debt by the year 2002.

There's a lot of good thinking about deficit reduction going on, both inside and outside of government, and I believe we should be at least willing to consider some bold and controversial options and to encourage our elected representatives to do so as well. I hope that we'll be willing to embrace those changes that would be best for the long-term economic health of our nation.

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