The American economy has shown remarkable resilience in the 1990s. Over the last five years more than 11 million new jobs have been created, the rate of unemployment has fallen to 5.4 per cent of the workforce and inflation has been kept below 3 per cent. Even the US budget deficit, seen as the greatest problem for the global economy at the start of the decade, has been halved. Now, as his second term unfolds, President Clinton remains confident that the US can maintain its strong rates of growth through to the millenium: the 1998 budget forecasts real growth of 2 per cent over each of the next two years, picking up speed to 2.3 per cent in 1999-2002.
If the Clinton White House can keep the momentum of the economy moving forward without higher prices it will be a remarkable achievement. Moreover, the US President will have provided the American business community, including the US carriers, with a unique period of stability in which to restore their finances and modernise their equipment, keeping them internationally competitive.
Sustaining this optimism, however, requires a great deal of confidence. The chairman of the Federal Reserve Board Alan Greenspan, the man with his finger on the US interest rate trigger, is growing concerned over the state of this recovery. He believes that the Dow Jones Industrial Average, which climbed to above 7,000 earlier this year, has reached unsustainable levels. The dampener from Greenspan is intriguing in two respects: it suggests his concern that asset prices have gone too far, risking an eventual crash, and that the market -- a forward indicator of the economy -- is not reflecting reality.
Despite the White House's confidence and success in bringing inflation down while maintaining low interest rates, Mr Greenspan remarked in recent testimony before Congress: 'There is no evidence that the business cycle has been removed'. It is the Federal Reserve's view that as the recovery becomes more mature and the jobless rate falls, the pressure on wages and prices is likely to increase. The odds are that the Federal Reserve will seek to tighten monetary policy and slow the pace of recovery in order to offset these inflationary pressures.
One of the reasons why there is so much optimism about US economic prospects is the revelation by economic researchers in Congress and at the Federal Reserve that the US inflation rate has been overstated as a result of the failure to capture the services sector accurately. That would mean that real growth has been understated and will make it much easier for the Administration to meet a balanced budget target by the year 2002. If inflation is one percentage point lower than had been anticipated, up to $100 billion over a five-year period could easily be saved in automatic inflation adjustments for pensions and welfare payments.
Clinton may in fact have the best economic inheritance since President Eisenhower in the 1960s: moderate growth, modest inflation and a shrinking budget deficit. The US may go through a mild slowdown between now and the millenium, but the conditions for deep recession -- of the kind seen in the late 1980s -- do not appear to be present.
Source: Airline Business
