Academic journal article ABA Banking Journal

1943, 1966, 1987, 1995 ... How Different Is This Cycle?

Academic journal article ABA Banking Journal

1943, 1966, 1987, 1995 ... How Different Is This Cycle?

Article excerpt

For bankers and other business people, the essence of life is living through business cycles. The average length of upturns since the second World War has been 43 months, while downturns have averaged 11 months. As we move through 1995, we are in the fifth year of an upturn that started slowly in the spring of 1991. You have to be over 50 to have seen this phenomenon twice before as an adult: there were similar marathon expansions in the 1960s and 1980s At this writing, the pace of growth is tapering off with the first quarter of 1995's GDP growth down to 2.7%, employment gains diminishing, and long bond rates that have plummeted The exact nature of our landing is yet to be determined, but from this fifth-year vantage point, there are things about this upturn to wonder about--things that will affect us as business people, consumers, and voters

Like the actors in Jurassic Park adjacent to the T-Rex compound, we wait for the inflation but thus far, things have been quite restrained The unemployment rate has been less than 6% for months, well below what many consider to be the NAIRU (NonAccelerating Inflation Rate of Unemployment), and capacity utilization hovers in the mid-80s--levels that in the past have been associated with rising prices. Has the costly success of the 1979-1985 period, which brought down inflation, and the continuing commitment of the current Federal Reserve Board resulted in a lasting change? Have the breaking of inflation, the crushing of the buy-inadvance mentality, and the focus on cost reduction as a way to boost earnings altered behavior? Have outsourcing, deregulation, and more flexibility in production reduced the relevance of the capacity numbers, or are we mismeasuring the capacity in light of recent strength in investment and changed management? It is probably too early to tell, but this far into the upturn one would have expected to see more cyclical price pressures. A review of capacity utilization figures plotted against changes in the GDP implicit price deflator suggests that pressures may be more muted this time. The Leading Index of Inflation has been falling now for three months.

In the early 1970s, there was serious concern about the slowdown in U.S. productivity growth (output per hour). Productivity growth is an important question as gains in productivity are over time the ultimate source of increasing living standards--that is, after a society has exhausted increasing the fraction of the population in the labor force, convincing non-residents to provide goods and services, and reducing the fraction of current production that is invested. …

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