CHAPEL HILL - The nation's near-term economic outlook remains marvelous, a University of North Carolina at Chapel Hill financial expert says. Vehicle sales could top 18 million for the year, and sales of refrigerators, freezers, washing machines, microwave ovens and other appliances all are at record levels.
Consumer confidence is high, and people expect inflation to average less than 3 percent a year over the next five years, says Dr. James F. Smith. Incomes are higher than ever, as is consumer spending. The budget surplus will be the largest ever and the biggest in proportion to the country's gross domestic product.
"In my 30 years as an economic forecaster, there has never been another year remotely like this one," said Smith, professor of finance at UNC-CH's Kenan-Flagler Business School. "All of us, even the most wildly optimistic, have had to increase our forecasts of real GDP growth several times and are now doing it again. This has been driven by the wonderful gains in productivity, which seem likely to persist, although the growth rate will certainly drop temporarily when the next recession hits."
The financial analyst, credited by The Wall Street Journal as being the nation's most accurate economic forecaster three times in the past five years, offered his views in the September issue of "Business Forecast," a bimonthly newsletter he writes for UNC-CH.
"One of the best trends in the United States is that every year a greater and greater proportion of the young people who ought to be graduating from high school actually are," Smith wrote. "While the dropout rate is still worrisome in some schools in some areas of the country, it is still lower than ever before."
Most American young people understand that the secret to success today is to earn a college degree, he wrote. This fall, a higher proportion of high school graduates will be enrolled in college than ever before -- almost 67 percent.
"College graduates earn, on average, each year a little over 1.5 times what high school graduates do. Their unemployment rate is also consistently lower. It's been under 2 percent all year."
Real gross domestic product growth will exceed 5 percent this year, Smith predicted. That would make 2000 the fastest economic growth year since 1984.
Labor productivity growth -- minimal from 1973 to 1991 and only 1.4 percent from 1991 to 1995 -- has doubled and is the top factor in the booming economy, he said. Such growth allows wages and salaries, profits and government tax receipts to grow without reductions in other areas. Economic growth is the sum of growth in the labor force, increases in average hours worked and worker productivity. That's why labor productivity is such a crucial economic variable.
"The great mystery is what caused this doubling of productivity growth, and the real concern for the future is whether we will see it sustained at 2.9 percent a year," he said. "If we do, then the annual long-term sustainable growth rate of the U.S. economy is about 4 percent. If labor productivity slides back to the 1.4 percent level, then the sustainable growth rate is only about 2.5 percent a year. This is a huge difference with enormous implications for future prosperity in the U.S."
A growing body of solid research done by skeptical economists concludes that it is likely to continue, Smith wrote. He cited a study by Federal Reserve economists Stephen Oliner and Daniel E. Sichel showing that information technology accounted for two-thirds of the labor productivity growth. Such a dynamic effect was not seen in earlier studies since computers and software were not yet pervasive.
So far, the beneficial impacts from growing investments in information technology have disproportionately favored the United States, he said.
"There are no inherent reasons why other countries can't copy this process and in some cases leapfrog old technologies with the newest and most efficient equipment and software," Smith said. "If this occurs, world economic growth will speed up in the next couple of decades. That would pay huge dividends in reducing poverty and increasing wealth."
Note: Smith can be reached at 919-962-3176 or 703-799-9685. As time allows, he's willing to discuss most economic issues with reporters.
By DAVID WILLIAMSON UNC-CH News Services
Aug. 15, 2000 -- No. 416