Economics Update (January-March 1998)

Continued but More Moderate
Growth in 1998, Guynn Says

J ack Guynn, president and chief executive officer of the Federal Reserve Bank of Atlanta, called the 1997 economy "one for the record books," and he predicted that 1998 will be another good year, in his annual address on the state of the U.S. economy.

Jack Guynn
Jack Guynn, president and CEO of the Atlanta Fed
In his remarks to the Atlanta Rotary Club in January, Guynn recapped the nation's 1997 economic performance: real gross domestic product (GDP) growth of approximately 3.5 percent and low inflation and unemployment rates, around 2.5 percent as measured by the consumer price index and 5 percent, respectively. Guynn said, "What's truly remarkable is that all this good news came in the same year and on top of five previous years of steady GDP growth, low inflation and a declining jobless rate."

For 1998, Guynn predicted continuing economic growth but at a more moderate pace than in 1997. He expects GDP growth to be around 2.5 percent on an annual basis in 1998, and he anticipates low levels of inflation and unemployment: around 2.5 percent and 4.5 percent, respectively. He added that consumer and business spending will remain healthy in 1998 but that growth in both will continue at a slower pace than last year.

1997: A Remarkable Year

In recapping 1997, Guynn attributed the year's strong economic environment to sound fiscal and monetary policies. With respect to fiscal policy, Guynn said, "The balanced budget agreement reached by Congress and the Clinton administration sends a clear signal that consumers and businesses — and not governments — will be the primary economic decision makers in the coming years." Guynn expressed disappointment, however, that the agreement failed to address Social Security or Medicare. "We ought to take the entitlement medicine now, while our healthy economy can help us stomach the resulting political indigestion."

As for monetary policy, Guynn said, "I think it's sufficient to say that low rates of realized inflation and ongoing Fed vigilance have nearly eliminated inflation as a major concern in business decision making."

Guynn attributed much of the economy's success last year to consumer spending, which he called "one of the big surprises of 1997." He continued, "At this point in an economic expansion, growth in consumer spending usually slows down, especially for durable goods. It didn't happen last year, however. Income growth, tight labor markets, low interest rates and a healthy economy encouraged consumers to spend more." Consumer spending accounts for two-thirds of GDP.

Business investment also played an important role in the economy's growth last year, Guynn said. "Businesses usually invest heavily in the early years of an economic expansion." The current expansion began in the second quarter of 1991. "Last year, however, [consumer] demand was high enough to support continued strong investment." Guynn also attributed strong business investment to "the desire to contain wage costs and address labor shortages. Businesses substituted capital for labor, which is exactly what you would expect in a tight labor market."

1998: Continued Growth, but Some Unknowns

"A strong dollar and weaker Asian [markets for American goods] will exacerbate the U.S. trade deficit in 1998."
Guynn predicted a good year for 1998 but tempered his outlook with caution about consumer debt and continued tight labor markets.

"Less borrowing and more saving would allow consumers to manage a little better if income and employment growth slow more than I expect," he said. As for labor, he noted that the limited supply of workers will continue to be a challenge for business. But he added that "tight labor markets in the absence of inflation are a good thing because they indicate rising standards of living."

Turning to the Asian economic crisis, Guynn acknowledged that "slower Asian growth will dampen U.S. GDP growth, and lower import prices will help keep inflation low." In addition, "A strong dollar and weaker Asian [markets for American goods] will exacerbate the U.S. trade deficit in 1998."

Nevertheless, Guynn added, "U.S. exports should continue to increase by at least 8 percent." He pointed out that exports to Hong Kong and the six affected Asian countries account for only 13 percent of all U.S. exports and that overall exports are equivalent to just 11 percent of GDP.

Referring to last year's rapid economic growth, tight labor markets and the Asian economic crisis, Guynn said he expects that 1998 will be "a little less interesting." And, he added, "for that, I think we would all be grateful."

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