As Good as It Gets

By GEORGE J. CHURCH

We should be drinking champagne every day to celebrate these times!" asserts Allen Sinai. But he and the other members of TIME's Board of Economists add a caveat: Don't wait to pop the corks. The economy right now is as good as it gets, perhaps the best in American history, Sinai claims, with little disagreement from his colleagues. However, it will start coming down off this giddy high very soon--maybe this summer. And fears are growing that the trip down could be bumpy.

Not that anyone foresees an actual recession--at least not before the year 2000 (known as Y2K to computer programmers, who are racing to make their electronic brains distinguish that year from 1900). In the majority opinion of TIME's board, which convened recently in Manhattan, the U.S. economy should continue growing over the next year and a half at somewhere between 2% and 3% annually. That is below the sizzling 3.7% of 1997 and the phenomenal 4.8% of this year's first quarter, but near--maybe a bit above--what used to be considered sustainable for the long haul.

For workers that is a bad news-good news forecast. Unemployment will rise from the 28-year low of 4.3%, touched in April, to perhaps 5% next year. But employers will still be beating the bushes for every worker they can find, if a bit less feverishly than today. And wages will be pushed up faster than prices.

For businessmen the outlook is less rosy; for investors it's rather scary. Profits will be squeezed by a combination of lower exports to Asia and rising wage costs. Chris Varvares, president of Macroeconomic Advisers, an economic forecasting and consulting firm in St. Louis, Mo., foresees an outright decline of almost 4% in after-tax corporate earnings this year, measuring fourth quarter against fourth quarter, and an infinitesimal 0.1 % increase in 1999.

Sinai, who is chief global economist of Primark Decision Economics, the Boston-based econometric prognosticator, forecasts a profit rise of 4% this year and 5% next. But he notes that his figures are below the lowest estimates being made by Wall Street analysts. He expects--"by the end of the summer"--a correction of 10% to 15% in today's stratospheric stock-market prices that will interrupt a long-term bull trend. Varvares is both more and less optimistic. He foresees only an 8% drop in the Dow Jones industrial average but one that will fall "on a sustained basis" through year's end.

Both Sinai and Varvares are raging bulls compared with Edward Yardeni, chief economist of the investment firm Deutsche Bank Securities. Formerly one of the stock market's biggest boosters, Yardeni now thinks the Dow may give one last spasmodic twitch up to 10000 by September, then fall 30% in 1999. That, he says, would be in anticipation of a global recession starting in 2000.

For the moment Yardeni sees the economy as Supertanker America, plowing strongly forward despite storms in Asia and elsewhere. But in 2000, he thinks, it could turn into Titanic America, with the computer Y2K problem playing the role of the rivets that, according to a current theory, popped when that fabled liner hit its iceberg. Computer programs generally signify years as two-digit numbers--98, for example--and tell the machine to read a 19 in front. Some programs were written long ago, and it is difficult and time consuming now to reconstruct their logic enough to rewrite them and then test and debug the new programs. And some programs are encoded onto microchips deeply embedded in the computer and almost impossible to get at. A computer that reads 2000 as 1900 will often be unable to make sense of the surrounding information and put out gibberish or crash, taking down other computers that have been fixed but interact with the faulty one.

In Asia, Yardeni sees a "depression" that is just beginning. Combine the effects of that bust and the Y2K problem, he believes, and the U.S. could suffer a downturn as severe as the one triggered by the 1973-74 oil crisis. Output then fell 3.7% from peak to trough.

Other board members concede that Yardeni points out real risks that could upset their far more optimistic forecasts. The uncertainties are evident in the wide spread of their projections on inflation. Sinai sees consumer prices rising only about 2% next year, vs. 1.5% in 1998. Varvares thinks next year's rate will be a little more than half a point higher. Yardeni foresees only about a 0.5% rise in 1999 and a drop of about 1% in 2000, the beginning of an outright and dangerous deflation.

There is agreement on one point: the 1997-early 1998 combination of surging growth, soaring profits, plummeting unemployment and virtually nonexistent inflation cannot last. The board feels that employers have reached the end of their ability to pass out raises and hold prices steady and still boost profits rapidly. Even if price inflation stays relatively quiescent, wage inflation is back, meaning unit labor costs will go up and profit margins will narrow.

The surprising thing is that this did not happen much earlier, given the intensity of the U.S. labor shortage. Lately the economy has been creating 175,000 new jobs a month while the available labor force has been growing by only 100,000 people a month. An all-time record 64.2% of the entire population is employed. Though managers complain most bitterly about the scarcity of skilled workers, the most "desperate" shortage, in the words of Mitchell Fromstein, chairman of Manpower Inc., is "at the bottom," by which he means fast-food outlets, hotels, motels, laundries, dry-cleaning shops, gas stations and the like.

Alan Krueger, a Princeton professor and expert on labor economics, points out that the unemployment rate has dropped most sharply among people whose education went no further than high school--even among dropouts. Wages have gone up most sharply at the bottom, he adds, which is good news for the American social fabric. It begins--just barely--to alleviate what has been a widening gap between rich and poor in the economy.

The Clinton Administration's former Secretary of Labor, Robert Reich, now a professor at Brandeis University, sees more than that to be optimistic about. He notes that almost half the current work force is between the ages of 35 and 50, vs. only 35% in 1980. "These are experienced people who are going to be more productive," he says, and their productivity is helping offset wage increases. They tend to stay in their jobs longer than younger workers, whose frequent churning creates heavy costs for employers. Reich and Fromstein both observe that employers have been inventive in finding "flexible" ways to reward workers without increasing fixed-wage costs. They are paying out relatively more in bonuses, commissions, stock options and other pay-for-performance schemes and relatively less in direct wages.

Workers' real earnings, nonetheless, have been going up, about 2% to 3% this year. Krueger emphasizes that the total compensation package of wages and benefits has been rising less rapidly because of a slowdown in the rate of increase in health-insurance costs. But now that rate is speeding up again. The resulting squeeze on payrolls is not disastrous but may soon be enough to prompt employers to lay off workers as their profit margins narrow. That is a major reason why most board members expect unemployment to rise at least slightly from its present remarkable lows.

That may ease the labor shortage but will not end it. Demand for high-tech workers will still outstrip the number of new graduates versed in science and math, creating employment bottlenecks. Fromstein suggests that one solution would be to attract more female students into these fields, which are still regarded, irrationally, as "male oriented."

But for a change it is employers who must feel more nervous about their best employees' intentions, not the other way around. Fromstein summarizes the attitude of workers in the still blooming economy thusly: "I'll give you everything I've got while I'm here, but I understand you don't owe it to me to keep me for life, and if an outside opportunity comes up, I may take it." Whatever comes next in the economy or the stock market, job seekers have become entrepreneurs in their own right.