The Good Bad News

Slo

wdown? Did anyone say slowdown? There have been plenty of worries about the effects of interest-rate hikes on the U.S. economy in the past few months, but when he takes the oath of office next Jan. 20, the next President, whether it's Al Gore or George W. Bush, will inherit the sunniest economic prospects to greet any new Chief Executive since Lyndon Johnson in 1963. Yes, it looks like the output of goods and services will be increasing more slowly. But the growth rate will slip only from one that clearly was too fast to last to a pace that can be kept up for years. And the new rate, somewhere between 3% and 4%, will still be so rapid that it would have been considered outright boomy not long ago. Unemployment will still be low, jobs plentiful, inflation modest, paychecks and profits robust. And the government will be raking in big enough surpluses to afford room for whatever tax and spending plans the new Chief Executive might push through Congress.

That was the consensus of TIME's Board of Economists, which gathered in Manhattan to take stock of the economic background to the presidential race now getting into full swing. The group included advisers who have helped shape both the Bush and Gore programs, and they disputed--though with remarkably little heat--the merits of those plans. But Democrats, Republicans and nonpartisan professionals all agreed on the fundamental outlook. And they left more than a hint that it would change little, if at all, no matter who wins the White House.

For the first time in its history, observed David Wyss, chief economist of Standard & Poor, the U.S. is in its 10th straight year of economic growth. "In dog years this expansion is about 70," he quipped, "but it is still behaving like a puppy!" Lawrence Lindsey, a resident scholar at the American Enterprise Institute and former member of the Federal Reserve Board, remarked that though economics is supposed to be "the dismal science," he and his colleagues on TIME's board were sounding full of "Panglossian optimism." No, the economists did not contend that this is the best of all possible worlds. But like Voltaire's Dr. Pangloss, they did insist that developments that at first glance might seem bad are actually good. Specifically, the slowdown in growth from manic annual rates of 6% for the most recent 12 months--the last half of 1999 and the first half of this year--and an unbelievable 8.3% in last year's final quarter.

The long-awaited slowdown is "absolutely" under way, said Abby Joseph Cohen, who heads the investment-policy committee of Goldman Sachs, the giant investment firm. The series of six interest-rate increases forced by the Federal Reserve between June 1999 and last May are not the only reason, she said. Consumers are also showing some signs of having temporarily satisfied pent-up demands. "If you bought a new car in 1999 or early 2000, you're not buying another new car; and if you upgraded your home by moving into another one over the past year or so, you aren't going to do that again anytime soon."

But Cohen insisted that the letup would leave the economy in "a fine place for us to be," and her colleagues agreed. Demand is slowing from a "surge rate" to a "sustainable rate," says Martin Feldstein, president of the National Bureau of Economic Research and once head of Ronald Reagan's Council of Economic Advisers.

Alan Blinder, visiting fellow at the Brookings Institution, a prestigious liberal-leaning Washington think tank, and vice chairman of the Federal Reserve from June 1994 to January 1996, asserted that the consensus forecast of most economists seems to be for gross domestic product (that is, total output of goods and services) to grow about 3% to 3.5% over the next year. He would go along, said Blinder, but consumer demand may not be letting up as much as Cohen thinks, and business has an "insatiable demand" for--and appetite to invest in--new information technology. So those predicting 3% to 3.5% growth are "walking on thin ice," says Blinder, because the actual figure could turn out to be higher.

Not that there is anything so bad about even 3%, Wyss points out: "Three percent in the '80s would have been a boom." Blinder is also impressed by how much better the economy is performing than anyone would have thought possible even a few years ago. Today's Fed, he proposed, is engaged in an experiment to see if the unemployment rate can be held permanently at around today's low 4.1% without triggering rapid inflation. The test may or may not work, says Blinder--but if he or Lindsey had suggested that the idea was even worth an experiment when they were both on the Fed, they would have been politely escorted out of the room.

In fact, TIME's board expects the experiment to succeed. The Fed, says Wyss, is about to pull off something never before achieved: piloting the economy to two "soft landings" in a row. The previous one was in 1995-96, when a series of earlier interest-rate increases by the Fed succeeded in draining away inflationary pressure while letting growth continue.