And The Beat Slows Down

Varvares voices the opposing view: the U.S. economy has been "exceeding its speed limits" for some time. Inflationary pressures were held in check because of higher labor productivity in the U.S. and by a worldwide plunge in commodity prices caused by the Asian economic collapse of 1997-98. Once that short-lived drop was over, a wage-price spiral began, caused largely by the labor shortage, which, in turn, reflects the too rapid growth rate. Sinai notes that wages rose at an annual rate of 4.8% from October 1999 through March of this year, while overall consumer prices have risen lately at a nearly 5% annual rate.

The Fed, says Varvares, fell "behind the curve" in fighting these trends. Sinai agrees and thinks Greenspan and his colleagues now have only a 30% chance of bringing about an ideal "soft landing"--a quick slowing of production growth to around 3.5% next year with an inflation rate "heading back toward 2%." Sinai sees a fifty-fifty likelihood of a "hard-soft landing," meaning growth at 2.5% for a year or so beginning in 2001.

Sinai's worst-case scenario, which he gives a 1-in-5 chance of coming true, is a "hard landing," meaning growth of 2% or less for a year or so. That would still not be a recession, defined as an actual drop in output, but it would have "recession-like characteristics," says Sinai--one of which would probably be rising unemployment, along with sagging business profits.

What could trigger such a development? One obvious risk is that the Fed could crack down too hard and too long on interest rates and money supply. Another is that a continuing slide in stock prices would deepen into a raging bear market that would depress both consumer spending and business investment. Swonk is worried that the occasional market rallies this year have been prompted by hopes the Federal Reserve will soon stop raising interest rates. She fears that if those hopes are disappointed, as she thinks they will be, stock prices could be vulnerable to a more dramatic correction next year.

Despite these worries, the board consensus is at least moderately optimistic. A soft or even hard-soft landing for the economy would not be very painful compared with bumps of the past. No one, for example, sees much of a rise in unemployment as likely. Sinai and Varvares think the momentum of the economy may push the jobless rate to 3.8% by the end of this year, even lower than the 30-year low of 3.9% reached in April. Unemployment can then be expected to increase a bit as the Fed-engineered slowdown takes hold, but no one seems to think it will go much higher than 4%, which is becoming accepted as practical full employment.

Best of all, members of TIME's board unanimously expect any slowdown to be no more than an interlude in what Kudlow calls "a long wave of technology-driven prosperity." He opines, "It's going to go on for a couple more decades." While his colleagues will not go quite that far, they agree that rising productivity will cushion the shock of slowdown and lead to greater gains when growth speeds up again. Swonk argues that "much of the productivity growth we see today results because we have figured out how to use network computers, not necessarily because of the birth of the Internet. Those gains [from optimum use of the Internet] are still ahead."

The sharpest dispute among TIME board members concerned whether there are any limits at all to long-term growth. Yardeni and Kudlow think not. Sinai, Swonk and Varvares believe there are, but add that these limits are far less restrictive than the ones previously thought to exist. Their thinking now is that the economy can hypothetically average growth of 3.5% to 4% a year, for years on end.

Not that the numbers will be the same every year, of course. Sinai believes business cycles will continue, but they will consist of fluctuations above and below these new norms, rather than the old dizzying swings between boom and bust. The new economy and the business cycle both live--only the cycle is not the beastly menace it used to be.