The 1997 economy — as good or better than “the good old days”
What an extraordinary year 1997 was for the U.S. economy. A year ago, the “Blue Chip” consensus panel forecast called for GDP to grow only 2.2% during 1997 (we were marginally more optimistic, looking for 2.3% growth). It now appears that the year’s gain in real GDP totaled 3.7%.
Even the most bullish of the 50+ forecasters in the consensus panel were expecting economic growth to just reach 3%. At the same time, most forecasters overestimated the degree to which inflation would re-emerge — and were surprised by the low level of producer and consumer price inflation. Many forecasters did, however, correctly anticipate incipient wage inflation pressures.
Who would have believed that after more than 7 yr of uninterrupted economic expansion, we’d get growth that exceeded even 1994’s gain, that inflation would remain under control, and that the unemployment rate would be stuck in the -5% range?
No, we don’t think that history will repeat itself in 1998. “Asian Contagion” seems sure to sap the U.S. economy of some of its vigor. We’re looking for a pronounced slowdown in economic growth during 1998. GDP will rise by an inflation-adjusted 2.3% this year, down from the heady 3.7% gain of 1997. Interest rates should be somewhat higher in 1998, as the Federal Reserve Board pursues a marginally tighter monetary policy.
Three major trends bear watching this year, and all will have a moderating influence on the economy’s growth potential. First, business investment spending will slow. Second, consumers will continue to bear a high level of debt, particularly installment (credit card) debt. And third, low levels of unemployment and the resulting increased wage demands will cause an uptick in inflation. None of these factors alone is significant enough to cause the U.S. economy to stall out in 1998, but we’ll be watching developments with a wary eye.
Economic expansion will continue into 1998
(Annual change, %, real GDP)*
Total 3.7 2.3
Consumer spending 3.2 2.5
Durables 5.2 4.5
Nondurables 2.1 1.8
Services 3.4 2.4
Business investment 10.3 6.4
Structures 4.5 3.8
Equipment 12.4 7.1
Exports 12.5 8.3
Imports 14.2 7.2
Government spending 0.9 1
*1997 estimated based on three quarters of data; 1998 forecasted by Reed Elsevier Business Economics