The U.S. economy appears to be hosting its own World Series. Close to clinching a ninth-consecutive year of economic growth, the U.S. may soon record the longest expansion in American history. Can such an incredible story of strong economic growth with low inflation be sustained?
At this juncture, the answer seems to be yes. Gross domestic product (GDP) growth ebbed to an annualized rate of 1.6 percent in the second quarter due to a sharp slowdown in inventory building. However, we can expect a rebuilding of inventories to help boost growth in the second half of 1999 to an average of around 4 percent. While companies strive to keep inventories lean, they do not want to lose sales because of insufficient stock.
Consumers are unlikely to snap their wallets shut anytime soon despite some restraining forces that have crept into the picture. While refinancing activity has plummeted to about 25 percent of its level at the beginning of 1999removing one source of added buying powerand the stock market has essentially marked time since spring, consumer confidence remains near record levels. Low nemployment has increased job security, and wages continue to rise faster than prices.
Automobile and truck dealers staged aggressive sales campaigns in August to generate the third-highest vehicle shopping spree in history. Although sales backed off in September, total automobile and truck purchases in 1999 will easily surpass the prior record set in 1986. Outside of dealerships, consumers seem to be heading in two directions: some are making a beeline for the volume discounters, while others are focusing on the upscale specialty stores. Parking lots outside middle-level department stores remain relatively empty.
Growth is once again spilling over into almost every economic sector. The upswing in Asia has triggered an upturn in manufacturing. The recovery in oil prices has also sparked resumption of oil exploration and development. Mortgage rates hovering slightly below 8.0 percent have discouraged or disqualified some potential homebuyers, but new home sales have held up surprisingly well. The farm sector, burdened by abundant harvests and large grain supplies, stands as the primary weak link in an otherwise very positive economic framework.
While some observers fear the U.S. economy is hitting too many home runs for its own good, indicators suggest otherwise. The core inflation rate, defined in terms of consumer prices excluding the volatile food and energy components, remains below last yearıs level. And while low unemployment has pushed up wages, overall increases have been moderate. Most importantly, productivity gains continue to offset much of the impact of rising wages, enabling companies to maintain profit margins with only modest price increases.
Will the U.S. economy continue to run at its current pace even as it heads into extra innings? Productivity growth will decide whether strong economic growth, low inflation, rising real wages and healthy corporate profit gains can all play on the same team. Large investments by U.S. companies and quantum jumps in technology, however, appear likely to sustain favorable results for some time, even if not at the records recently scored.
The information provided in this analysis was obtained from sources that Bank of America deems to be reliable; however, we do not guarantee its accuracy or completeness.