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July 11, 2002
Nervous mood obscures steady economic improvement
By James W. Coons
I recently completed a brief speaking tour in the Midwest that focused on prospects for the economy and financial markets. The questions and comments from the audiences revealed much about the nervous mood of the nation.
The contrast with just a few years ago was remarkable. In the late 1990s, the number one worry of business people was getting and keeping workers. At its low-point in 2000, the unemployment rate reached a thirty-year low. Ninety-six of every one hundred people who wanted to work had a job, leaving few for employers to fight over. Unemployment had never been lower in peacetime, with the exception of the boom period immediately following World War II.
If there was a number two concern, it was that rising wages would create inflation and prompt the Federal Reserve to increase interest rates. Job-hopping became a profitable pursuit for many in-demand workers. Computer programmers just named a price. And construction contractors dared not even speak with a competitor’s tradesmen.
As I said at the time and as subsequent events demonstrated, the tight labor market was a blessing and would not rekindle inflation. Flex-time, job-sharing, on-site day care, and a generally worker-friendly attitude spread in response. No laws or regulations could have spawned such improvements in the quality of workplace life.
At the same time, inflation did not rise, even though wages and salaries accelerated. The reason was that higher worker pay was matched by greater worker production. In part due to hiring difficulties, businesses invested heavily in plant, equipment, and processes that made workers more productive. Labor costs increased less than 2% per year during the 1990s, after adjusting for higher worker productivity.
Today, people have a longer list of worries that are more real, but probably less threatening than they sound.
The number one question was about the effect of terrorism on the economy and financial markets. Additional attacks, even on a smaller scale, would be tragic, but the healing process is already well along. Widespread recognition of the threat would limit the effects of another attack on the economy and financial markets. Investors hate surprises, but the element of surprise is gone.
Longer-term, the principal effect of the terrorist threat
will be a slower rate of economic growth by an unknown but small amount.
The reason is simple. The attacks started a shift in economic resources
away from endeavors that increased the ability of companies to grow
toward uses that protect against loss. As necessary as this shift might
be, it will unavoidably reduce growth of the economy over time.
The second most common question was about the corporate scandals. The seemingly endless revelations of corporate misdeeds have understandably shaken the confidence of investors. But here again, the healing has begun and is well along.
Notice the quickness and severity of attacks on well-known
and highly respected companies when merely the question of impropriety
surfaces. We can be sure that corporate directors have. Nurturing that
interest, managers of large mutual fund families and pension funds
who have the clout to demand changes in boardrooms are growing more
forceful. And the recent proposals outlined by President Bush, including
longer jail time for fraud, add momentum to the motion of the markets.
Out of this dark period will come better financial reporting and a
closer alignment of management and shareholder interests.
Third, many asked about the lagging economic recovery. Total employment has been slow to turn, but that is typical. More detailed labor market indicators reveal convincing improvement just beneath the surface. The pace of lay-offs has slowed to a more normal level, and a reliable survey of hiring intentions points to solid growth in employment during the remainder of the year.
Meanwhile, the economy has expanded in each of the last three quarters, and the consensus of 3-4% growth for the second half is reasonable. The economy will necessarily grow less rapidly than in previous expansions, because there is so little lost ground to regain. The economy contracted in only one quarter and by only a small amount, and the cyclical housing and auto industries avoided large downswings.
As usual, my audiences were well-tuned to the risks at hand. But once again, the course of events is likely to be better than feared.