Economist predicts business expansion will surpass last cycle.
Hold on to your hats: The next cycle of business expansion will be bigger and better than the last one, which was a record breaker by many measures.
That's what economist Barry Asmus told an attentive crowd during his optimistic and enthusiastic speech at the general session of Raymond James Financial Services' 2004 National Conference for Professional Development in Orlando in late March. Asmus, whose latest book is The Best Is Yet To Come, is the senior economist with the National Center for Policy Analysis, a nonprofit, nonpartisan research organization headquartered in Dallas that promotes private alternatives to government regulation and control.
The last business expansion, from 1983 through 1999-briefly interrupted by a couple of downward blips in 1987 and 1991-ended after the stage was set for the "perfect economic storm," Asmus says. He explained the scenario: Companies overspent on technology in 1999 because experts warned them about the Y2K disaster that never happened, Federal Reserve Chairman Alan Greenspan kept raising interest rates, energy prices tripled and dotcoms became dot-toast. Down went the Dow Jones Industrial Average, by 7.1% in 2001 and 16.76% in 2002. Meanwhile, the S&P 500 plummeted 11.9% in 2001 and 22.1% in 2002.
But now we're into the next business expansion, observed Asmus. According to revised figures from the federal Bureau of Economic Analysis released in late March, real GDP increased at an annual rate of 4.1% in the fourth quarter and 8.2% in the third quarter of 2003. Consumer net worth is more than $40 trillion, compared with $20 trillion in 1990, Asmus noted, and 1.1 million new homes were sold last year.
But where are the new jobs? Asmus said the U.S. economy is going through a structural change in manufacturing, similar to what happened with agriculture 100 years ago. Then there were 60 million Americans employed in agriculture; today there are 2.5 million, he said. In 1955, 35% of the labor force was in manufacturing; today it's about 15% and will drop to 5% over the next 15 years, he added. Like agriculture, manufacturing will continue to do more with fewer people. "The factory of the future will have two employees: a man there to feed the dog and a dog there to make sure the man doesn't touch the machinery," he quipped. "We'll still be a great manufacturing economy. We're manufacturing more now than before."
Although U.S. manufacturing jobs are being lost, that's only part of the story, he said. Cheaper production means products cost less so people have more to save or spend on other things, he said. Not only that, but foreign companies, such as Toyota, are locating plants here that employ American workers, he explained.
High insurance costs and the war on terrorism will continue to impact the economy, Asmus continued. Limits need to be placed on medical malpractice awards, which contribute to high health-care costs and siphon resources away from other sectors, Asmus maintained. The war on terrorism will go on for ten years, he predicted, and the United States needs to be more vigilant.
So, why does he think the next business expansion will be stronger than the last? For one, the double-digit inflation that occurred during various times in the 20th Century won't happen in the 21st, he maintained. A stable price system has been created over the last 20 years in the United States and that will be the basis for strong economic growth, he said.
"In every other expansion, things got better, but not necessarily cheaper," he said. "Now, they are better, cheaper and faster. Now we have digital deflation." He described "digital deflation" as the reduced pricing for products as they've become technologically more advanced. For example, he said, his first cell phone cost $300 and did relatively little, while his latest cell phone cost $60 and does everything but bake a cake.
Stable prices, low inflation and low interest rates mean equities can support higher price-earnings ratios, he maintained. Great improvements in the productivity of the American labor force are helping drive the business expansion, as well as lower marginal tax rates, Asmus said. From 1970 through 1990, productivity gains averaged about 1.5% a year, he said. In the early 1990s, they increased to about 3% annually, and more recently we've seen annual increases of 4% to 6%, he added. Although productivity has nearly quadrupled, we're undercounting productivity and overcounting inflation, Asmus is convinced.