Masonry Magazine June 1988 Page. 21
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The economy's growing vigor is beginning to concern many economists in government and industry. They're surprised by the better-than-expected business performance. It is showing the kind of zip that could bring on a resurgence of inflation-leading to a further tightening of labor markets, plus strains on capacity. Inflation is already an increasing worry at the Federal Reserve Board. It is determined to prevent an eruption of price pressures. The central bankers are tightening now to brake the expansion.
This reflects a sharp turn-around in the sentiment of many economists. As the year began, their worries focused on the prospects of a recession. The stock market's fall crash was expected to inhibit spending by consumers. And a big build-up of inventories would bring large cut-backs in production.
Now, economists' concerns have shifted in the exact opposite direction. They see the risk of too much stimulation, rather than too little. They can't rule out a surge of inflation.
A PREPONDERANCE OF RECENT BUSINESS STATISTICS FAVORS THE PLUS side. Analysts are hard pressed to find any sector that is registering weakness. The employment figures have been quite impressive for several months now. The unemployment rate fell to a nine-year low during the spring to 5.6%. Payroll employment zoomed by just short of a million in the first quarter.
Economists have to believe firms are hiring because business is strong. Anecdotal reports tend to confirm this appraisal.
The earlier concern about an overhang of inventories has evaporated. The big stocks built up last fall have been worked off as sales have risen. And the run-off has been occurring without any severe damage to production. Much of the build-up was in new cars, which have been selling very briskly so far this year and briskly enough to lead Detroit to step up assemblies.
Thus, it is not hard to envision some pick-up in production. As stocks are pared, firms will raise output to meet demand.
Much of the demand will be coming in orders from abroad in exports. U.S. producers are benefitting significantly from the slide in the dollar. Exports are becoming increasingly competitive in the foreign market-place, while higher import prices allow U.S. firms to recapture domestic markets. A further drop in the dollar's value would strengthen U.S. competitiveness.
New plant and equipment spending by business is also picking up. Orders for capital goods have been increasing steadily.
Even the consumer seems to be providing some support for the economy. Retail sales have shown signs of strengthening lately, especially for autos. It is not hard to see why the consumer appears willing to continue spending. Job prospects are encouraging, confidence is high, and incomes are climbing.
Net, many economists are raising their economic forecasts for 1988. They have now abandoned earlier projections of 2%-2%% real growth this year. Real Gross National Product-output of goods and service after inflation-may well increase by 3%... and even that may turn out to be on the low side.
The stronger business picture has made worries about inflation real. With the economy operating closer to capacity, a break-out could well occur. Economists believe that consumer spending will continue to roll along. But the economy does not have the capacity to support both strong export demand and strong domestic demand at the same time... not without pushing up prices.
Signs are starting to show that price inflation is picking up steam. The Producer Price Index has risen at a 7% rate recently, a disturbing trend. Economists hear that firms are posting higher prices on goods and making them stick.
Further, labor markets are currently tightening in parts of the U.S. as the economy gets closer and closer to a so-called full-employment level. Recent data have begun to suggest that wages could soon start to speed up. No one is certain what the full-employment level is, but it is surely close. To be sure, some experts say the jobless rate can go lower without inflation. They point to shifts by labor to nonwage objectives over the last few years; concessions granted by unions in exchange for job security are one example.
But, at some point, wage increases could well begin to speed up again. And that would risk a reversal of all the progress achieved in recent years. Note, too, that many find today's inflation rate unsatisfactory. An inflation rate of 4% is a long way from price stability, in the view of these analysts.
The Federal Reserve is determined to avoid a resurgence of inflation. The central bank made a modest tightening move in monetary policy in April. And it may well have to take further restraining action in the months ahead. The purpose would be to moderate the economy's increasing forward momentum. Fed policy-setters cannot let business activity grow too fast and overheat. They don't want the economy increasing at much more than a 2% growth rate-not with output getting closer to capacity and labor markets now tightening.