Economy continues to shine, despite the looming clouds

Let's face it: The economy is a ball of fire right now. The Commerce Dept.

06/01/1998


Let's face it: The economy is a ball of fire right now. The Commerce Dept.'s "advance" report (meaning it will be revised, and is not final) on first quarter 1998 GDP showed that the economy's white-hot growth continued into the early months of this year.

The government estimates that overall GDP grew at a 4.2% annualized rate during January-March 1998, despite an absolute decline in the export of goods and services and in government spending. Even more impressive was the news about inflation -- the price index for gross domestic purchases was unchanged between the fourth quarter of last year and the first quarter of 1998. It's been more than 40 yr since we've seen such a low measure of inflation at the total economy (GDP) level.

The first quarter GDP increase was fueled by strong gains in consumer spending, home building, and capital spending for new equipment. Consumer purchases rose at a 5.7% rate during the first quarter of this year, almost twice the growth rate recorded for October-December 1997. Durable goods purchases soared to an 18.4% annualized growth rate during the first three months of this year after rising just 1.9% in the fourth quarter of 1997.

Nondurable goods purchases increased 5.2% in the first quarter, more than four times the growth trend registered over the final three months of last year. Services expenditure growth was more subdued, increasing at a moderate 3.5% rate in the first quarter of 1998 after a somewhat stronger 4.4% increase during 1997's fourth quarter.

The strong first-quarter GDP report came in above-consensus expectations. Inventory investment continued strong (a decline was widely anticipated) and the unusually sharp decline in exports simply wasn't enough to offset bullish consumer and business spending patterns.

It is now clear that, in the short term, the Asian crisis has actually been a boon for the U.S. economy. Weakness abroad has kept interest rates and energy prices low and the competition from foreign imports has restrained domestic inflation. These benefits should begin to dissipate in the months ahead, however, and the negative effects of Asia's problems should become more evident and lead to slower gains in GDP.

As a result, we expect the economy to grow at a 2.8% pace in 1998, down from a 3.8% growth rate in 1997. The primary cause of slower economic growth will be one of two things. Most likely, the Asian currency crisis, or "Asian Flu," will ultimately slow U.S. economic growth. If the Asian currency crisis does not significantly slow the U.S. economy, we still believe the growth in economic activity will ease later this year because the Federal Reserve Board will step in to slow growth by raising interest rates.

Unemployment rates are extremely low (below what the Fed believes is "full employment"). As a result, further growth in the U.S. economy puts upward pressure on wages and overall inflation as employers compete with each other for existing labor. Inflation is the Fed's nemesis, and it won't be allowed to spread its roots too far before the Fed takes pre-emptive action to stem its progression. Either way you read it, economic growth will slow as 1998 progresses.





No comments
Consulting-Specifying Engineer's Product of the Year (POY) contest is the premier award for new products in the HVAC, fire, electrical, and...
Consulting-Specifying Engineer magazine is dedicated to encouraging and recognizing the most talented young individuals...
The MEP Giants program lists the top mechanical, electrical, plumbing, and fire protection engineering firms in the United States.
Water use efficiency: Diminishing water quality, escalating costs; Lowering building energy use; Power for fire pumps
Building envelope and integration; Manufacturing industrial Q&A; NFPA 99; Testing fire systems
Labs and research facilities: Q&A with the experts; Water heating systems; Smart building integration; 40 Under 40 winners
Maintaining low data center PUE; Using eco mode in UPS systems; Commissioning electrical and power systems; Exploring dc power distribution alternatives
Protecting standby generators for mission critical facilities; Selecting energy-efficient transformers; Integrating power monitoring systems; Mitigating harmonics in electrical systems
Commissioning electrical systems in mission critical facilities; Anticipating the Smart Grid; Mitigating arc flash hazards in medium-voltage switchgear; Comparing generator sizing software
As brand protection manager for Eaton’s Electrical Sector, Tom Grace oversees counterfeit awareness...
Amara Rozgus is chief editor and content manager of Consulting-Specifier Engineer magazine.
IEEE power industry experts bring their combined experience in the electrical power industry...
Michael Heinsdorf, P.E., LEED AP, CDT is an Engineering Specification Writer at ARCOM MasterSpec.