THESE ARE THE GOOD OLD DAYS BUSINESS IS BOOMING, INFLATION IS FALLING, JOBS ARE PLENTIFUL, AND AMERICAN INDUSTRY IS WAY OUT IN FRONT. THE U.S. ECONOMY IS STRONGER THAN IT'S EVER BEEN BEFORE.
(FORTUNE Magazine) – Look around you and savor this moment, because it's a very special one. Job prospects are terrific. Unemployment is lower than it's been in nearly a quarter century. Business sales and profits are growing handsomely. Inflation has almost disappeared. The financial markets are booming. The U.S. is the world's preeminent industrial power and--even more important--the unchallenged leader of the technological revolutions of our age. Today's prosperity may turn out to be just another business-cycle peak, to be followed by recession or stagnation, or it may turn out to be the beginning of an unprecedented epoch of opportunity and wealth. But it's something you'll want to remember. Because someday, somebody will ask you what it was like in 1997, when the U.S. economy was stronger than it had ever been before.
That's right, the best economy so far. Better than the swinging Sixties or the earnest Fifties or even the roaring Twenties--eras people often think of as golden ages. It's now: 1997. The best measure to begin with is the towering chart immediately to the right: total U.S. output per capita--the broadest measure of a nation's economic well-being. Even adjusted for inflation, it's far higher today than in past periods of prosperity.
Not that it's a perfect economy. Eleven percent of America's families live in poverty. Many others have suffered a decline in real income since 1989. And most American individuals and companies still have legitimate economic complaints, such as too-high taxes or overly restrictive regulations.
You can also quibble that earlier eras were better by some measures. The U.S. had a higher share of world trade after World War II, for instance. Gross domestic product growth was in fact better in some years in previous decades, the unemployment rate was lower, and wealth was more equitably distributed in others. But as Victor Zarnowitz--one of the nation's best-known business cycle economists--notes, people tend to forget the problems of past expansions. The Twenties, for example, were not only wildly inequitable but also interrupted by three recessions. Compared with prior booms, "things are very, very good today," Zarnowitz says. In the past, Mark Zandi, chief economist at Regional Financial Associates, always held up the Sixties as the archetype of economic strength. But that expansion--the longest in U.S. history--was artificially fueled by spending on the socially destructive Vietnam War, which initiated the inflationary spiral that nearly crippled the economy in the late Seventies. Today, he says, "we're better positioned now than we were 30 years ago. The Sixties laid the foundation for the Seventies, one of our darkest periods in history. The Nineties outlook is brighter." Says Allen Sinai, a longtime Wall Street economist who describes himself as a fairly cautious guy: "I think this may be the best economy in U.S. history and probably the world."
Sure, some of today's terrific economic news is the result of the latest business cycle upswing. But some--perhaps even most--reflects more fundamental improvements in the American economy. American companies are more competitive than ever because they are the creators and leaders of the information technology revolution. They are also being managed better than they have been in living memory. Some of the credit should even go to Washington, both for what it has done--whittling down the budget deficit and finally getting inflation under control--and for what it hasn't done. The "gridlock" that politicians bemoan has had the happy side effect of preventing the government from launching any grand schemes that could potentially destabilize the economy, such as President Clinton's ambitious health care reform plan. Finally, whether you give the credit to Ronald Reagan or the larger forces of history, the U.S. finds itself the unchallenged military superpower again, meaning fewer of its future economic resources will have to be diverted to defense.
But before analyzing the reasons for the economy's present strength, it's worth dwelling for a while on its happy consequences. Never before, for example, has a job market provided so many opportunities for so many people. With the economy generating an abundance of new jobs--213,000 per month, on average, in 1997--some employers are literally chasing after prospects. In Omaha, where a telemarketing boom has driven the unemployment rate below 3%, the mayor gave out his telephone number on national TV last year, asking anyone who was looking for work to give him a call. IBM sent recruiters to Daytona Beach, Florida, for spring break, looking for vacationing college seniors. True, the latest unemployment level of 4.9% is above the high-3% range of the late Sixties boom, and higher than the all-time low of 1.4% reported in 1919. But today's job market is far more inclusive. Sixty-four of every 100 American adults is working today, compared with 52 in 1929 and 55 in 1967.
And although discrimination continues, women and minorities have far more opportunities than ever before. Blacks, for example, now have 7% of the nation's management and executive jobs. There aren't even good records of what that number was in the Sixties. Tyra Mariani, this year's valedictorian at Howard University, turned down job offers from Chase Manhattan Bank, GTE, Andersen Consulting, and A.T. Kearney before signing on with McKinsey. Her father, a switchman for the CSX railroad, and her mother, a retired insurance customer-service representative, didn't have such chances. "It was their generation that began making inroads into corporate America for our generation," she says.
Wages have stagnated--the often-quoted Department of Labor figures show that the average hourly wage today is worth only $7.50 in 1982 dollars, down from a peak of $8.63 in 1973. But those numbers reflect only the cash compensation of hourly workers. More benefits are being paid out, and those who receive salaries have done better. Average family income has grown robustly, due in part to millions of wives who've taken jobs. The average was a record $51,353 in 1995, up $11,000 in inflation-adjusted dollars from the Sixties boom. That's meant there are lots of people like Ted Moore, general manager of the Albera Bros. Jeep/Eagle dealership in San Francisco, whose prosperous family is pictured at the beginning of this article. Investment income has helped Moore to buy his children luxuries his parents couldn't dream of: "I went to Disneyland for the first time when I was 24," he says, "but my kids have gone there every year. We definitely have it better than my parents."
Such confident and free-spending consumers make for unprecedented levels of growth and profitability in the business world. Corporate after-tax profits hit a record $378 billion last year (in 1992 dollars)--triple the level of the Sixties. And executives expect business to keep improving. The FORTUNE Business Confidence Index (a monthly poll of big-company chief financial officers) is at record levels; the latest survey of the National Federation of Independent Business (small companies) found the highest levels of optimism in the history of the 23-year-old poll. For many high-tech companies, the biggest problem today is keeping up with demand. After starting from scratch in 1989, Alameda, California-based Ascend Communications finished last year with $550 million in sales of its remote networking devices. It expects to top $900 million by year-end. Fueling the explosive growth: the Internet. CEO Mory Ejabat says Ascend is benefiting from a virtuous circle: "A strong economy has led to more people using the Internet," which creates more demand for remote networking equipment--his and his competitors'--and workers, who then use the Internet even more.
Plenty of older companies, of course, are quick to say they had it better in the past. Many manufacturers, for example, look back at the Sixties as the golden age, says Gordon Richards, economist for the National Association of Manufacturers. But some of that gold came from rising military spending. Some manufacturers simply yearn for the days when there was little foreign competition. Thirty years ago, hard as it is to recall, imported cars were still a curiosity in the U.S. In fact, Richards says, today's low inflation and stable growth environment "is the best possible situation for manufacturing."
Bob Strudler, chairman of U.S. Home, remembers the Eighties as the glory years for housing construction. But that pace, as we found out in the early 1990s, was unsustainable. This time around, he says, while increased competition has the entire industry in fighting trim, construction firms have had "four years of decent and consistent margins." And this time "there's no drop-dead market out there." Instead, he says, there's every sign that the current steady pace will continue for the next several years.
The record-setting business climate has translated into a record-setting investment climate. One broad measure: Those who bought a Standard & Poor's 500 index fund at the beginning of the expansion in 1991 earned a 91% return on their investment by year-end 1996--the best six-year performance since 1960. Even those who bought the index late in the expansion--say, January 1, 1995--would have earned 55% in just two years. "All things considered, this has been the best of times in this generation" to invest, says Shelby Davis, manager of the Davis New York Venture mutual fund. One way to gauge the impact of the booming stock market on the economy is the total value of shares on the New York Stock Exchange per capita: It stands at $27,500 today compared with $15,000 in 1967.
One of the foundations of the economy's unusual strength--and a reason to be optimistic about its future--is the impact of computerization. According to W. Michael Cox, an economic adviser at the Federal Reserve Bank of Dallas, the invention of the microprocessor in 1971 has had the biggest impact on the economy since the advent of electricity more than 100 years ago. And American companies are reaping an inordinate share of the benefits because they were the first to realize the importance of computers and invest massively as a result. Better still, the U.S. is continuing to invest and solidify its lead. Americans account for more than 40% of the world's investment in computing. Americans spent a world-leading $850 per person on infotech in 1995, eight times the global average of $98 and more than twice the level of Western Europe, according to industry consultant International Data Corp.
The gains in efficiency and productivity from this investment are surely reflected in the economic data for manufacturers--manufacturing productivity is rising at a far-above-trend rate of 3.9% per year. But the statistics for the service sector are mysteriously low, leading many economists to question the quality of the data itself. "Where we can measure productivity [in manufacturing], it is doing very well," says Allan Meltzer, an economist at Carnegie Mellon University. "Where we can't, it isn't." But the evidence of the real world, Meltzer maintains, proves that service productivity must be higher.
It is obvious, for example, that computers have dramatically improved the efficiency of service companies, such as Federal Express, the Memphis-based overnight shipping service. Two-thirds of FedEx's orders come in via its point-of-sale hardware and software. Without it, the $10.3 billion giant would have to add another 20,000 employees and generate an additional two billion pieces of paper, says chief information officer Dennis Jones.
Even apart from the benefits of the infotech revolution, American companies are better managed today than in previous decades. A major impetus was the arrival of foreign competition in the Eighties, which forced all kinds of companies to cut costs remorselessly and keep a hard-eyed focus on the bottom line. Ask Bethlehem Steel CEO Hank Barnette what his company has been up to since the Eighties, and he reels off statistics about improvements in technology, work force utilization, and training. "Over the past ten to 15 years we've invested something on the order of $6 billion to modernize and maintain our facilities," says Barnette. The payoff: Over the past eight years, Bethlehem's productivity has doubled. A ton of steel that used to require at least seven man-hours to produce now requires only three.
The economy also has benefited from relative peace around the world and, strangely enough, in Washington. Ten years ago the idea that the U.S. should--or could--balance its budget was highly controversial. Similarly, the notion that the Federal Reserve should drive the inflation rate down below 3% was considered radical. Today, after several hard-fought battles over deficit reduction--led most recently by the Clinton Administration--and a decade's worth of Alan Greenspan's consistently smart management of the Fed, both of those ambitious ideas are becoming reality. Although there are still critics of both fiscal and monetary policy, a broad, bipartisan consensus now exists that favors sound, conservative macroeconomic policy.
Back in the late Eighties, the fondest wish of many a corporate CFO was that the U.S. just leave tax policy alone, following the violent shifts made from 1980 through 1986. That's in fact what happened. Ideological battles between the Democratic Administration and Republican-controlled Congress have created a providential--for most businesses--stalemate. The balance of power has prevented either side from passing any but the most popular--or most innocuous--legislation. As longtime Washington observer Norman Ornstein, a resident scholar at the American Enterprise Institute, puts it: Politicians are acting "only where they need to. The government is not crashing around and can't inadvertently put an elbow to the nose of the economy."
Pro-business moves like the opening of international commerce via the North American Free Trade Agreement and the General Agreement on Tariffs and Trade--both of which had been undertaken in the Eighties and were pushed through Congress early in the Clinton Administration--have aided the U.S.'s remarkable export boom, which has been an important source of the economic expansion. Exports have doubled in real terms over the past ten years, to $826 billion (in 1992 dollars).
And finally there's the "peace dividend." The economy seems to be benefiting from the end of the Cold War at last: Only 3.2% of the nation's gross domestic product is expected to be spent on the military this year, down from the Reagan buildup high of 6.1% in 1987. That's released millions of workers and billions of dollars for more productive uses. In 1987 at Wellesley, Massachusetts-based EG&G, for example, about 70% of revenues came from defense contracts for such things as nuclear weapons components. As military expenditures dropped, EG&G exited those businesses and concentrated on developing products for commercial applications. In one case, EG&G turned military technology into an improved kind of flash bulb; it now makes all the flash lamps on Kodak disposable cameras and 60% of Fuji's. Today government work accounts for only 30% of EG&G's business.
So there you have it: The nation is more prosperous that it's ever been, and American businesses seem to be especially healthy and competitive--it's not such a stretch to say they've got the world at their feet. And there appears to be little sign that Washington politics or some nasty overseas conflagration will poke a stick in the spokes of the continuing economic expansion. What's there to worry about?
Some pessimists fear that the U.S. stock market may mimic the Japanese market of the Eighties--rising far above fundamental values and then crashing. Remember just a couple of months ago when the stock market dropped, suddenly and unexpectedly, and then wobbled worrisomely before booming back upward?
Many economists are concerned that recent real wage gains indicate inflation is finally poised to take off. "The signs are there," says David Wyss, research director at DRI/McGraw-Hill. One reason to fear inflation: If the Federal Reserve becomes convinced that the threat of rising inflation is real, it will raise interest rates as high as it needs to in order to cool off the economy--and that, in fact, is how most recessions have begun. Some also fear that this expansion may have been purchased on borrowed cash. Consumers are charging up record levels of debt, alarming many informed observers. Deputy Treasury Secretary Lawrence Summers says complacency is as great a danger as any facing the U.S. economy. Says he: "An excess of complacency leads to credit extension, which leads to excess leverage, then overextension."
But perhaps the single biggest long-term danger for the U.S. economy isn't one that will much affect the normal economic measures or pose any immediate threat to the current expansion: the growing gap between rich and poor, and between those who have the education and skills to benefit from the emerging high-tech economy, and those who don't. While millions of Americans have marched into comfortable prosperity, at least as many--perhaps even more--have fallen back. A study by Rand Corp. economist Lynn Karoly, for example, found that those in the top 10% of the income distribution saw their wealth rise 11% between 1973 and 1993. But the real income of families in the bottom tenth of income distribution fell almost 16% in the same period. The main reason: Changes in technology have left behind those without the skills to adapt.
While inequality has certainly widened during this expansion, there is hope, at least, that this rising tide is finally beginning to lift all American boats. The booming job market, for example, appears to be brightening the prospects of high-unemployment groups such as black males, whose unemployment rate has fallen from 15% in 1992 to below 10% today. And depending on how one slices the data, it's possible to argue that Americans are starting to get real raises again. Per-capita income for both whites and blacks, for instance, has made slow but real progress throughout the Nineties.
Where do we go from here? All the economic indicators point to continued expansion--at least through this year and maybe even the next. After that? Well, there's no law that says an economic expansion must end--though it's always happened before. Eventually we no doubt will enter a period of stagnation or even recession. This is where our recent history offers signs of hope. Since 1982 we've had only one recession, short and mild. What we can hope for--and what certainly seems within the realm of the possible--is that the current expansion will continue, and that the forces that have produced the powerful, stable economy of 1997 will help ensure that future fluctuations will be less extreme and less harmful than those of the past.
With reporting by Ed Brown, Ani Hadjian, and Lenore Schiff