Economics Update (January-March 1996)

Fundamentals in Place for Moderate Growth

Editor's Note: This article is excerpted from speeches Atlanta Fed President Jack Guynn gave to the Atlanta Rotary Club on March 11 and to the Pension Real Estate Association on March 13. Guynn shares his outlook for the U.S. economy and discusses a short list of public policy issues that he believes are particularly important. The full text of the Atlanta Rotary speech is available on the Internet at

he U.S. economy should expand by about 2 percent on an annual average basis in 1996. This expansion in GDP (gross domestic product), while basically the same as last year, signifies that the economy remains on a moderate growth path. Unemployment in 1996, on an annual average basis, should be about the same as last year's 5.6 percent rate. Inflation, as measured by the consumer price index, should continue to average between 2-1/2 percent and 3 percent. That would not be much different from last year's 2.8 percent.

One way to look at the overall picture is to say that the economy is moving forward without major impediments but also with somewhat less momentum than we experienced earlier in the recovery.

As might be expected in a well-balanced economic environment, there are few glaring weaknesses or overpowering strengths. The component that should contribute the most strength to the economy as we move through 1996 is capital spending. Consumer spending may not be as strong as it's been in the past few years. Net exports should continue to improve, although more slowly than previously projected. But neither of these should be a drag on the economy. Government purchases, on the other hand, look like they will be a net drag.

Jack Guynn, president and CEO of the Atlanta Fed
Capital Spending

After several years of extremely rapid expansion at double-digit rates, capital spending by businesses on factories and equipment should slow to a still-quite-healthy rate in 1996.

Conditions to support this rate of growth are still good. Corporate profits remain healthy, and equity gains have enhanced corporations' ability to raise cash. Also, although long-term interest rates have risen recently, they are still low compared with past years. Overall, then, what we have is the balancing of growth in capacity utilization with anticipated demand growth, which is yielding slower investment.

As usual, investment in equipment—particularly computers—is outpacing growth in office buildings, factories, and other structures. It's important to note that we don't see the alarming level of speculative building that had emerged in some regions at this stage of other economic expansions.

Although inventory growth was down over the past two quarters, and domestic demand does remain moderate, I believe that the adjustment of overabundant inventories during the last year is about complete.

Consumer Spending

Moving from the business side to the consumer side, spending by consumers has slowed recently, but prospects for the long term are reasonably healthy. This year, it looks as though consumers will slow their pace of spending growth slightly compared with last year. This rate should be easily managed because it will be in line with personal income growth. Despite all the headlines and personal anecdotes about reengineering, downsizing, and permanent layoffs, payroll employment rose an average of more than 140,000 jobs per month last year. At the same time, personal income, unadjusted for inflation, rose at an annualized rate of about 6 percent. This moderate growth on both fronts should continue into 1996.

Housing will probably be a strong factor in the economy as lower mortgage rates should give it a small boost. Housing starts also should rise in 1996 after falling in 1995, but the level won't match the pace of earlier years. With increased home building, spending on household durable goods, such as carpets and major appliances, should grow moderately. Demographics, along with saturation of pent-up demand, will also hold automobile sales to a modest growth rate.


In the area of international trade, our trade balance is likely to improve as the year goes on. The underlying factors behind this expected improvement include projections of moderately stronger growth on average for

We at the Federal Reserve feel strongly about protecting the purchasing power of our citizens' income—it is, in essence, our sacred trust.
our trading partners. Several of our largest trading partners, Japan, Mexico, and Canada, will most likely be facing only modest growth this year, as will most of Western Europe. Growth rates should be strongest in the developing economies of Asia and most of Latin America. Another factor that should help to improve the trade deficit is the somewhat restrained pace of domestic spending, which will keep import growth slow over the next several years.

But forecasts for this sector are tricky because they depend on what happens to the economies of our major trading partners, and their growth has averaged less than ours over much of this expansion.

Government Spending

Finally, the area of government purchases will be affected by what kind of agreement Congress and the president reach on balanced-budget legislation. Still, in the current atmosphere of restraint, government purchases should remain flat in 1996, with federal purchases declining and state and local government purchases increasing. This situation will probably dampen economic growth.

Summary of Economic Outlook

That's my outlook for the national economy, and it shows that I believe the fundamentals are still positive.

Tracking the economy over the last couple of months has been a little like tracking the return of a spacecraft from orbit in the early days of the space program. If you remember, there was a period of time during a spacecraft's return to earth when NASA's control center would lose communication with it. During this blackout period, it was also impossible to get current data on the trajectory, so it wasn't completely clear where the craft would splash down. In a sense, we held our breath waiting for the parachute to open.

That's how it's been with the economy of late. We know the trajectory of the economy at the time of the government shutdown, which interrupted the gathering and reporting of much of our economic data. The shutdown was followed by a series of blizzards and flooding that disrupted some economic activity. So we are less sure than we customarily would be about the trajectory of the economy as we enter 1996. In the long term, however, the economy still appears to be on the kind of trajectory that will give us moderate and sustainable growth.

Three Public Policy Issues

Now, let me set forth three important public policy issues.

First, an issue that's of special interest to me—and that I think has major economic consequences—is continuing the restructuring of the banking industry. I've spent a lot of my career dealing with banks and bankers. This experience has led me to conclude that the present framework in which banks operate is far from optimal. We must find a way to let banks do what they do best. Freeing banks to compete fairly with other financial institutions is good not just for banks but also for businesses and consumers—in fact, for the entire economy.

Restrictions have finally been relaxed on geographic expansion. Now it's time to broaden the products banks are allowed to offer. To me and to many others, it's clear that Glass-Steagall restrictions on what banks can do ought to be dismantled. The Federal Reserve and other regulatory agencies have done their part to allow certain well-managed and well-capitalized banks to add new powers on a limited basis. While I believe these measures are appropriate and helpful, I advocate moving beyond incremental measures and acting comprehensively. This kind of action must be taken by Congress.

The second issue on my list is price stability or the control of inflation. In the United States, we at the Federal Reserve feel strongly about protecting the purchasing power of our citizens' income—it is, in essence, our sacred trust. So, every chance we get, we point out that an environment of stable, low inflation encourages the most efficient allocation of resources. This enhances our standard of living and, ultimately, improves economic well-being. This result does not appear instantaneously, but it does emerge over a longer period of time. That is why a true commitment to low inflation requires a long-term perspective. We've come a long way in dealing with inflation from the days in the late '70s and in 1980 when it hit a high of 13.5 percent. Those were indeed the "bad old days."

One of the very happy developments in economic policy over the last 15 years has been the reduction of inflation to a modest and relatively stable rate of about 3 percent.

Despite this trend, there may be times in the future when certain forces will argue for relaxing the commitment to long-term price stability in favor of other interests and other outcomes. And if those times come, and surely they will, it will be extremely important to the Fed and other policymakers for business executives, as well as workers and consumers, savers and investors, to stand up for preserving the major gains we've made with respect to price stability.

The third crucial issue—deficit reduction—is one that I thought might be settled by now. But because it has not been settled, it has become even more important than before. Earlier this year, I had great hopes that Congress would hash out the difficulties in balancing the budget and reducing the deficit. But both Congress and we as a nation seem to have lost momentum. I'd like to say as strongly as I can that we must not lose our nerve. We must make the necessary progress in this area in order to gain the long-term benefits. It's time now to make the toughest decisions, decisions that will profoundly change the way government has been operating in the economy.

Ironically, we've already imposed some of the fiscal restraint that was being discussed because some federal agencies and programs aren't being fully funded in 1996. But we've done so without gaining the credibility that a long-term commitment to deficit reduction would bring. In other words, we've incurred a lot of the costs without ensuring the benefits. I understand that, politically, this debate over what to cut when and where is extremely difficult. But I would ask, is it not worth sticking to our own resolve to create a stronger economy and a stronger nation?


In conclusion, my economic outlook speaks of moderate and balanced growth and low inflation. It may seem too optimistic for some, but I'm convinced that the weakness we've seen is most likely only temporary. Barring any unexpected events, the economy should be able to remain on a moderate path to the ultimate benefit of all. No doubt, we'll be faced with many unexpected shocks and challenges in the years ahead, and I've alluded to a few of them. But I believe that we're more capable than we've ever been before of dealing with the toughest problems and creating a better economy both for this region and for the nation.

Return to Index