Chugging toward a Slowdown: How the Economy's Greatest Strength-Our Faith in the Boom-Could Become Its Biggest Vulnerability for the Next President and Federal Reserve Chief Alan Greenspan
The president-elect--whoever he is--cannot be watching the economy with much serenity. What's driven this economic boom has been confidence in the boom itself. People have acted as if it could go on forever, and they have spent accordingly. But we are now seeing the first signs of fraying confidence, following several weeks of adverse economic news. Last week a Gallup poll reported that 48 percent of Americans believe the economy is getting worse, up from 29 percent in July. A NEWSWEEK survey had mixed results. Only 26 percent thought the stock market would drop in the next year, but 54 percent thought a recession "very likely" or "somewhat likely." If confidence unravels, the mild economic slowdown that's now unfolding could deteriorate quickly into a nasty slump.
The specter must spook the administration-in-waiting. It would threaten the new president's popularity, play havoc with budget planning and, possibly, create conflicts with Alan Greenspan's Federal Reserve. For the record, few economists yet forecast a recession, and Greenspan last week hinted that a weaker economy might allow the Fed to cut interest rates. Still, the irony of the present situation remains: the economy's greatest strength--over-powering confidence--could become its biggest vulnerability, if the modest slowdown punctures the prevailing optimism. That could trigger a chain reaction of crippling cutbacks in consumer and business buying.
Consider how hyperconfidence has shaped the boom. Since 1992, consumer spending (on everything from cars to computers) has outraced personal income. People have borrowed, cashed in stock profits or stopped saving. The personal-savings rate--saving as a share of after-tax income--has fallen from almost 9 percent to roughly zero. Suppose that Americans, worried by rising debt or falling stock prices, increased their saving. If the savings rate rose only to 2 percent, that would lower consumer spending by about $140 billion: fewer SUVs, appliances and mobile phones sold.
Corporate investment faces a similar danger. Here, too, there's been a binge. From 1995 to 1999, investment spending rose 54 percent. Companies bought computers, installed communications networks and built factories and warehouses. In manufacturing, there's already idle capacity. In the third quarter, industry operated at 82.2 percent of capacity compared with 85.4 percent at the peak of the 1980s' business cycle. Indeed, investment has already suffered from a drying up of new capital. In 1999 and 2000, nearly $100 billion of bonds have gone into default, reports Moody's Investment Services. Companies haven't been able to meet payments. Naturally, "New Economy" companies now find it harder to borrow.
In short, a slowdown could feed on itself--and the slowdown is now unmistakable. Last week General Motors said it would build 1.3 million vehicles in the first quarter of 2001, down 14 percent from the level in 2000. Intel, the world's largest computer-chip maker, said that weak demand for personal computers would mean flat or lower revenues in the fourth quarter. Or consider broader economic indicators:
Retail sales rose less than 0.1 percent in October compared with almost 1 percent in September.
Housing construction has dropped about 4 percent from 1999 levels.
Manufacturing production has stagnated since late summer.
Initial claims for unemployment insurance have increased from about 300,000 to 350,000 a week since early fall.
Alone, these small setbacks aren't alarming. Indeed, the Fed intended them. Since mid-1999, it's raised interest rates six times to prevent runaway spending and low joblessness from increasing wage-price inflation. …