NEWS

U.S. economy faring better than most people realize, expert says

By DAVID WILLIAMSON
UNC News Services

CHAPEL HILL -- While not faring so well as it has in recent years, the U.S. economy remains in decent shape and will perform better this year than the economies of Japan, Germany, the United Kingdom, France, Italy and Canada, a University of North Carolina at Chapel Hill business expert says.

"The outlook is bright," said Dr. James F. Smith, adjunct professor of business administration at UNC’s Kenan-Flagler Business School. "We won’t do so well as Ireland, but we will outperform all other large democratic economies. We may grow by 2.6 percent this year and 3.8 percent in 2003."

For as long as the next decade, the United States could average 3.5 percent growth in real gross domestic product annually with very low inflation, Smith said. "Then we’ll go into recession again, but we can worry about that down the road," he said.

Smith, rated by The Wall Street Journal as the nation’s most accurate economic forecaster in three of the past five years, made his remarks in the latest issue of the Business Forecast, a Kenan-Flagler newsletter.

"Many analysts and pundits seem to like nothing better than to regularly suggest that the current expansion of the U.S. economy is ‘fragile,’ ‘sputtering,’ ‘headed for a double dip’ or some equally inaccurate and unflattering phrase," he wrote. "These are the people whom William Safire, at the time a speech writer for President Nixon and now longtime New York Times columnist, called ‘the nattering nabobs of negativism’ in a speech delivered by then-Vice President Spiro T. Agnew.

"The truth is that nearly every new economic indicator each week gives testimony to the strength and robust nature of the current expansion in the United States. This year will see economic activity at all-time record levels, and next year will be even better."

Among signs that the U.S. economy is not nearly so shaky as many people seem to think is that business investments in equipment and software have turned up, Smith said. Other signs are that consumer confidence remains high, as measured by the University of Michigan’s Index of Consumer Sentiment, and that more people are relying successfully on state and federal programs that enable them to buy their first homes. Still others are that both new and existing single-family home sales are robust and both long-term fixed and adjustable-rate mortgages are near all-time lows.

"Consumers have an aggregate $6.7 trillion of equity in their homes," he said. "While most of this will never be borrowed against, it’s suggestive of the buying power that can be supported by increasing the amount of mortgage debt," he said.

All the gloom and doom about drops in the stock market will pass, and the Dow Jones Industrial Average, at least, should set new records within a year if not by 2002’s end, Smith said.

"The big profitable companies in the Dow are continuing to increase revenues and profits, even using the most stringent accounting rules possible," he wrote. "Indeed, the fallout from the shenanigans of (such companies as Enron and WorldCom) with very bad actors in very high places is that the quality of corporate earnings in the U.S. today is higher than it ever has been before. This should reassure investors, both domestic and foreign."

Because it is an election year -- and despite the fact that few elections in either the House or the Senate will be closely contested -- the U.S. Congress is doing bad things, Smith said. Among them are that self-serving members are not controlling wasteful spending by passing a budget resolution.

"Protectionism also is running rampant in Washington," he said. "In an almost unbelievably misguided effort to support bankrupt steel companies, the United States slapped tariffs of up to 30 percent on imported steel. The impact is to raise steel prices (thereby reducing the profitability of thousands of small steel-using manufacturers in the United States that employ 10 times the number of people that the U.S. steel companies employ), hurt consumers and infuriate allies."

Farm bill legislation is just as wasteful if not more so, Smith said. The nation is wasting $190 billion over a decade, for example, to subsidize large farms that grow corn, wheat and soybeans.

Also, "our totally ridiculous sugar policy, which makes sugar in the U.S. cost about three times world prices, wasn’t even considered for review. Then we wonder why candy producers move to other countries."

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