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US Expansion Turns Eight, Record Length In Sight By Isabelle Clary

NEW YORK (Reuters) - The U.S. economic expansion turns eight on April 1 and, barring an unexpected storm, will sail into the next millennium as the longest period of prosperity in American history.

The Clinton Administration and Federal Reserve Chairman Alan Greenspan already call it the longest ``peacetime'' expansion, just 10 months shy of the record-setting 1961-1969 stretch marked by the Vietnam War. Economies usually grow faster in war times as governments spend heavily and industry gears up to feed the war machine.

Commentators have groped for adjectives to best describe the rare mix of robust growth, low unemployment and subdued inflation that makes the United States, in Greenspan's words, an ``oasis of prosperity'' in a financially troubled world.

``The 1990s is the best decade of the century for the American economy, no doubt about it,'' said St. Louis Fed Director of Research Robert Rasche, who added he does not think healthy expansions must ``die of old age.''

Since April 1991, The expansion has created over 19 million jobs -- enough to employ the entire population of Australia -- while the U.S. Gross Domestic Product (GDP) rose by about $1.6 trillion, roughly the size of France's economy.

Meanwhile, American households' net worth surged nearly 80 percent to more than $36.0 trillion, thanks in part to a roaring U.S. stock market that propelled the Dow Jones industrial average from 2900 to 10000.

But the post-Gulf War expansion did not generate high praise until 1996, when economic growth really took off and tight labor markets drew the long-time unemployed back to the work force.

The business cycle started on an austere note, with massive white-collar layoffs that earned it the nickname of a ``jobless expansion'' as corporate America focused on productivity and spent trillions of dollars on new technology and automation.

The U.S. had to work off the many excesses of the 1980s. Households were saddled with mortgages bigger than their home equity, taxpayers had to pick up a $150-billion tab for the thrift debacle and the U.S. federal budget deficit neared $300 billion.

``What is amazing about this expansion is how stable it has become in recent years. In a way, the expansion took care of solving its balance-sheet problems early on, and that is paying off now,'' said David Resler, managing director at Nomura Securities International.

The Fed did its share early on to ensure that the frail expansion would not falter, halving the benchmark federal funds rate, which governs overnight inter-bank lending, from 6.0 percent in April 1991 to 3.0 percent in 1992.

Lower interest rates helped U.S. banks, corporations and consumers sort out their debt burdens. The government, meanwhile, embarked on drastic budget discipline that resulted in a $70-billion surplus in 1998, the first in 29 years.

As the economy recovered, the Fed had to reverse its easier monetary policy in 1994, with an aggressive tightening cycle that boosted interest rates to prevent inflation.

``This may be the most important contribution of the Fed to the expansion because it really changed people's minds about inflation. People no longer took it into account in their business plans,'' Nomura's Resler said.

But the preemptive strike was so aggressive that it threatened to undermine the expansion, prompted the Fed to relax credit in 1995, and fuelled a debate led by then-Fed Vice Chairman Alan Blinder about the cost-effectiveness of actively fighting further an already low inflation rate.

The Fed endorsed that view after Blinder left in 1996, raising the funds rate just once in 1997 and actually lowering it three times in 1998 to shield the U.S. economy from the global turmoil that has roiled emerging markets since mid-1997.

``We were willing to say the economy is working in a way that it has not worked before, that we, in fact, don't fully understand. But we are going to let it happen and that is very much our current stance,'' Federal Reserve Bank of New York President William McDonough explained last week.

The payoff has been a surprisingly robust economy over the past three years, with the unemployment rate holding below 5.0 percent since July 1997 and growth averaging nearly 4.0 percent -- its pace through most of the third longest expansion in November 1982 through July 1990.

Americans remain confident the long-toothed expansion remains young. A recent University of Michigan survey showed U.S. consumers were upbeat about the next five years, expecting ``the expansion to become a teenager'' by 2004.

-- da vinci (, March 30, 1999


Our current economic situation sounds a lot like the late 1920's...full employment, negligible inflation, a bull market...and a spreading recession in foreign countries.

-- Kevin (, March 30, 1999.

"The stock Market is that creation of man which humbles him the most - Anonymous"

"Wall Street's graveyards are filled with men who were right too soon" - William Hamilton

-- anonimouse (, March 31, 1999.

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