When the economy does start to pick up pace a little, we should not expect it to get back any time soon to the kind of growth rates that we had in the late 1990s. The reason for that is that, in part, we developed some excesses and imbalances in the economy during that period that are likely going to take a while to work off and will probably constrain growth for some time. And a lot of those excesses were related to the big run-up in equity values, which caused a major deficit of private-sector savings relative to investment. Household savings diminished, business-investment spending boomed. Maybe it got a big excessive, particularly in tech.
Those things are going to have to be worked off, and that will restrain aggregate demand for awhile. Now, easier fiscal and monetary policy, presumably, will help cushion the blow and will help the economy recover somewhat. But I don't see us getting back to those supercharged growth rates fully that we had in the late '90s. A lot of people are talking about whether the economy's growth shape is going to look like a "V" or a "U" or whatever letter du jour. I doubt that the right-hand side of that letter is going to get fully back up to where we were at the peak, so it's going to be sort of a truncated V or U.
Simonoff: Where do you see unemployment peaking out at?
Feinman: In my scenario where you have growth at 1% in the fourth quarter of last year, something like that in the first quarter and maybe 1.5% in the second, and then gradually moving up towards 3% by late this year, I would expect the unemployment rate to move up to say, 4.75%, possibly 5%, by early next year. And then, if we get back toward something closer to trend-like growth, it'll sort of level off there. By historical standards, it's still a very tight labor market. Another imbalance that developed during the late 1990s, in addition to maybe excessive investment and deficient savings, was in order to meet this voracious aggregate demand, the economy not only had to rely on foreign production increasingly, but it also had to stretch its labor resources to a great extent.
Now we're seeing some of the ramifications of that. Unit labor costs are starting to accelerate, and that process may continue for a while, as compensation continues to firm and productivity slows with economic slowdown. And you know, I think that's a classic sort of symptom of a late-cycle overheated labor market that you get.
Horrigan: I can see a peak close to 5%. Maybe that's optimistic. I'm a bit skeptical about the quality of the unemployment statistics. It sometimes seems that every time employment drops, the labor force drops, too, so you don't get as much movement in the unemployment rate as we used to.
McCulley: I would have no difficulty with a 5% handle on unemployment. It's going to go up. And we, in the economics profession, have a rule of thumb called Okun's Law that tells us for each two percentage points below potential GDP you are for a year, the unemployment rate will go up one percentage point. So if you operate on the notion that we have a 3.5% potential GDP and we're going to have, you know, maybe 1.5% type of growth for the year, by Okun's Law, that would imply that the unemployment rate would go up a full percentage point. That would take you somewhere to around 5%.
Simonoff: This is really the first major slowdown of the New Economy, or the information economy. In what ways is it likely to be different? You mentioned that it was a deflationary boom, not an inflationary boom. What are some of the other characteristics we're seeing out there?
McCulley: You haven't seen as much pain as you're going to see on Main Street. The pain has, obviously, been front-loaded on Wall Street. But I return to the proposition that it was a bubble economy. I'm a believer in the New Economy, and I think the New Economy essentially is about unbridled embrace of capitalism, which tends to give you bubbles and busts, as opposed to a more socialist type of system.
We had a bubble in investment, and that's a deflationary type of thing. And deflation is nefarious for corporate profits. It's actually quite good, if you have a job, because real income grows pretty nicely. So I think that's one of the reasons why the average bloke on Main Street considers life to be OK, as long as he doesn't lose his job, is that deflationary pressures actually increased the real value of his paycheck. But it seems to me a key issue is, in the face of contracting corporate profit margins, that you're going to see a continuation of the desire to scale down things.