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.

The improving fortunes of many other countries also will drive economic expansion in the United States, he said. More countries-71 out of 165-are free or mostly free today, more than ever before, and freedom is the mainspring of economic prosperity, Asmus said. "When other countries do well, we do better," he said.

Other positive factors for the economy, he said, will be our move from "pharmaceuticals as chemistry to pharmaceuticals as biology"-pharmacists before long will be able to dispense medicine based on factors in an individual's blood, for example. Our dependence on oil will also drop as the country moves to photovoltaic cars-those with solar cells built in that can supplement power for hybrid and electric cars, Asmus adds.

And let's not forget the contribution the 75 million baby boomers will make to this business expansion. When this huge cohort entered the workforce in the late '60s, '70s and early '80s, they were inexperienced and it was cheaper to add labor rather than increase productivity, Asmus explained. Now the economy is benefiting from the experience they bring to the workplace, he says. Also, the older baby boomers are at an age when their propensity to save rather than spend is increasing, which should also help the economy, he said. Asmus added the next big group of Americans to rival the baby boomers in terms of numbers-about 70 million-is, on average, in sixth grade now.

Asmus concluded that all these factors should create an environment ripe for business expansion, and the boom cycle that began last year could last longer than the long boom of the '90s. Said Asmus, "It looks very good for the next couple of decades."