The Future Of The Economy In The Year 2000 Essays -

The Future Of The Economy In The Year 2000 The economy has performed exceptionally well for the past several years, combining rapid growth and very low unemployment with declining inflation. ?Not only has the expansion achieved record length, but it has done so with far stronger growth than expected,? stated Federal Reserve Chairman Alan Greenspan in his remarks to the National Community Reinvestment Coalition annual conference in Washington (Business Week, The McGraw-Hill Companies, Economic Outlook, March 6,2000). Figures show that since 1996, the growth of GDP has averaged more than 4 percent, compared with an average of about 3 percent since 1973. Because of those four years of rapid growth, the unemployment rate has fallen to 4.1 percent, its lowest level since January 1970. Consumer Price Index (CPI) inflation, excluding food and energy prices, had been vacillating at about 3 percent per year earlier in the decade but was roughly 2 percent over the past year (Bank of America, Economic in Brief, November 1, 1999). Much of the auspicious recent economic developments can be attributed to a surge in productivity growth. Alan Greenspan noted in his statement that output per hour in the non-financial corporate sector had increased since 1995 at nearly double the average pace of the preceding 25 years (First Union, Monthly Economic Outlook, March 7, 2000). This rapid productivity growth allowed the economy to grow at a faster pace without raising the rate of inflation. However, the growth of consumer demand is exceeding the increase of productivity?boosting employment, tightening labor markets, and raising concerns that recent growth rates may not be sustainable without sparking a rise in inflation. After spending the past several years, extolling the virtues of improved productivity in allowing higher growth with less inflation, the Federal Reserve Chairman, seemed to turn the tables in his Humphrey Hawkins testimony, stating that the spurt in productivity has produced expectation of higher profit growth, which, in turn, have resulted in higher equity valuations. That surge in equity prices is seen as the primary driver of the ?wealth effect?, which he believes has created an ?imbalance? between demand and supply, raising inflation pressures (Business Week, The McGraw-Hill Companies, Economic Outlook, March 6,2000). Speculations of this occurrence may over the long term indicate that the higher the trend growth of productivity, the lower the inflation rate?due to the restraint of labor costs. However, in the short-run, if productivity growth jumps rather quickly to a higher level, its impact on demand would outrun the existing supply of recourses to meet that demand. Since supply cannot be increased quickly enough, Alan Greenspan believes demand growth must be brought back into line with supply growth. The mechanism to achieve a balance, he believes, is higher interest rates. High interest rates have, in fact, dampened home sales, but the overall economy has not cooled enough to reduce inflationary fears. The Fed is still concerned that strong consumer spending will lead to inflation. Right now, much of the strong demand is being satisfied by imports and expanded U.S. production from increased employment (Bank of America, Economic Research, Economic in Brief, November 1, 1999). Nevertheless, the Fed is worried that there may be limits to employment growth or foreign willingness to hold U.S. dollars earned exporting to the United States. Fed policymakers would be much more comfortable if the demand for goods would slow, thereby reducing the risk of the economy overheating or the dollar falling. Recent increases in the price of oil have reached their highest level since the Gulf War, and further increases could hurt U.S. economic growth. OPEC's decision to cut production last March has lead to rising inflation last year. Considering the most recent leap in oil prices, inflation reports in the near future could be strong, pushing the twelve-month CPI rate up to 3 percent or more (Business Week, The McGraw-Hill Companies, Economic Outlook, March 6,2000). The question of whether to maintain the status quo or increase production remains in the hands of OPEC members. At present, Saudi Arabia and Iran appear to favor increasing production, but some other constituents want to extend the production cuts. OPEC is likely to announce specific production plans at its next meeting on March 27. In