CHAPEL HILL - Despite slowing growth, the short-term U.S. economic outlook remains superb, and the nation will lead the world to new economic records this year, a University of North Carolina at Chapel Hill financial expert says. The next recession will begin in May 2002 but will be mild and relatively short. The N.C. economy also looks strong, and world economic growth will be the best since 1988.
"This year is definitely one for the history books ... and the U.S. economy just keeps setting new records," said Dr. James F. Smith. "There has never before even been a 10th year of an economic expansion in the United States, much less a 10th year that posts by far the highest growth rate of the entire expansion."
Smith, finance professor at UNC-CH's Kenan-Flagler Business School, described the national, state and world economies in the November issue of "Business Forecast," a newsletter he writes for the school. Twice in the past four years, the Wall Street Journal ranked him the nation's most accurate economic forecaster.
"This year will post one of the three highest economic growth percentages of the past 21, second only to the sizzling 7.3 percent of 1984, which was the highest since the 7.6 percent of 1951," he wrote.
High U.S. energy prices, relative to past years, will slow growth but not stop it, Smith said. Vice President Al Gore's recent attempt to score political points by getting President Clinton to release 30 million gallons of oil from strategic reserves made no economic sense, most analysts agreed. The amount released represented only a three-day U.S. supply, and higher prices provide tremendous incentives to find new oil sources and economize. "The actual result of new discoveries, the application of new technologies to produce a larger proportion of the oil and gas from known deposits, and conservation efforts has been that the reserves of energy today in relation to demand are higher than at any other time since World War II," Smith said.
Higher oil prices slow growth by reducing the amount of money people can spend on other things, he said. They also hold down gross domestic product growth because the nation imports such a high fraction of its oil, and higher costs from abroad boost the trade deficit with other nations.
The U.S. Bureau of the Census released a report Sept. 26 showing that for the first time the median U.S. household income topped $40,000. Only 11.8 percent of households were below the poverty line in 1999, down from 12.7 percent in 1998.
"The largest increase in incomes in 1999 went to families in the bottom 20 percent of the income distribution," Smith wrote. "Their incomes rose 5.4 percent last year. The incomes of the top 20 percent went up 3.9 percent. These results, and probably equally if not more favorable ones in 2000, are contributing to record levels of consumer confidence. Low rates of unemployment help too."
More U.S. residents are employed than ever, and they are earning more money, he said. The Christmas shopping season should be wonderful.
By next April, census reports could indicate North Carolina's population hit 8 million people for the first time. The state now is the 12th largest economically, behind only Georgia and Florida in the Southeast and just ahead of Virginia. Unemployment has remained well below the national average for eight years.
Vice President Gore will defeat Texas Governor Bush in November, Smith predicted. "The main reason is because the economy is so healthy," he wrote. "History suggests that U.S. voters rarely feel compelled to change the party holding the presidency when times are good."
The next recession probably will start in spring, 2002 and will be both short and mild, comparable to the recession that began in July 1990 and ended in March the next year, Smith said. Slowly increasing inflation coupled with federal efforts to curtail it will be the cause. It should be over by February 2003.
"There are not now and there are unlikely to be by then the kinds of excesses in the system that are associated with deep or lengthy recessions," the economist said. "No one expects that the secret to raising profits is to raise prices. The only way to raise profits is to increase productivity."
In the long run, the biggest problem will be dealing with retirement of the baby boomers, he said.
"If we don't figure out how to do that successfully, huge problems will appear by 2030."
Note: Smith can be reached at (703) 799-9685 or (919) 962-3176. As time allows, he's willing to discuss most economic issues with reporters. His e-mail: smith.jf@mindspring.com.
Contact: David Williamson, (919) 962-8596.