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Prosperity, fueled by rising productivity, shows no signs of waning
Sunday, April 09, 2000 By Paul R. Flora , Post-Gazette Staff Writer
All three experts queried in this year's annual survey of economic forecasts stressed the importance of productivity growth as the key factor in the current record-breaking economic expansion as well as the key to its continuity.
In February, the United States set a record for the longest economic expansion, according to records dating back to 1854. The previous record of 106 months spanned February 1961 to December 1969. Now at 108 months old and counting, the current expansion shows no signs of stopping.
In fact, the U.S. economy did slightly better than our experts predicted a year ago. For job growth and the unemployment rate, the differences were insignificant.
However, 1999's 4.1 percent growth rate of real gross domestic product was better than the 3.5 percent average of last year's predictions.
Pittsburgh's unemployment rate also was slightly better than the predictions. But compared to recently revised employment estimates, expectations for job growth in the region from two of the three economists were overly optimistic.
This time last year, concerns about a global economic crisis were waning, the Y2K bug had people nervous and fears were growing that tightening labor markets might eventually squeeze prices higher and stall the expansion sometime after 1999.
The biggest difference in today's outlook is a stronger, more pervasive belief that the new economy is for real, according to Mark Zandi, chief economist at consulting firm RFA. Instead of being a fleeting fiction of statistical whimsy, productivity growth has continued to accelerate, Zandi said.
Changes in the national economy, based on improvements in information technology, are boosting productivity and increasing optimism about the economy's prospects.
"The productivity explosion is making believers out of everyone," said Jim Diffley, economist at consulting firm WEFA.
And to the extent that information technology is responsible for gains in productivity, "We have only scratched the surface."
If productivity continues to increase, growing 3.5 to 4.0 percent in 2000, it could generate even stronger overall economic growth than forecasted, said Stuart Hoffman, chief economist at PNC Financial. And that growth would occur in a very benign inflationary environment.
Hoffman also cited the roaring stock market, a strong world economy and an election year as factors also likely to propel the expansion.
Europe's economy is coming on strong, Latin America is out of recession and Asia, with the exception of Japan, is growing rapidly. Therefore, Hoffman said, U.S. businesses should see increasing demand for exports.
Election years tend to boost economies rather than burden them, as candidates, especially incumbents, and their parties coddle voters with increased public spending. And with tills overflowing for most governments around the nation, the potential exists for significant government largesse in 2000, Hoffman said.
It's the stock market that serves as a significant driving force in the expansion, yet also poses one of the greatest risks. As long as it continues to surpass expectations, the market advances will boost corporate profits and fuel consumer spending, according to Hoffman.
Strong fundamentals should continue to lift the stock market, but if some of the smaller, 10-percent market corrections don't stick, then a larger correction may result.
Despite Federal Reserve Chairman Alan Greenspan's warning of excessive valuations, stock prices continue to rise.
Zandi, however, said that the higher the market goes, the greater its potential to disrupt the expansion if it were to drop dramatically.
In the absence of market corrections, the Federal Reserve is continuing its course of tighter monetary policy to rein in the galloping expansion. So far, those efforts have been largely applauded and have not shaken consumer confidence.
Consumer confidence in both the economy and expectations of a continuing low inflationary environment also are being tested by the recent runup of oil prices.
So far, oil price increases have not permeated the broader economy.
However, the more fundamental problem of a tight labor market could drive wages higher and sow the seeds of rising inflation.
Which brings us back to productivity. The cure for this labor market is productivity growth that outpaces wage hikes.
With rapid productivity gains, the U.S. economy can continue to experience the euphoric environment that currently exists -- falling unemployment, rising wages and low inflation.
And that world is just what conventional wisdom predicts for 2000. Pittsburgh's economy follows the nation's, although it remains underpowered by comparison. Job growth in Pittsburgh is expected to continue at 1.1 percent, the same pace as last year. Holding steady would be somewhat of a relative improvement since U.S. job growth is expected to slow from 2.2 percent in 1999 to 1.8 percent in 2000.
The region's unemployment rate is expected to edge down from 4.3 percent in 1999 to 4.1 percent, the same rate as the nation.
And Pittsburgh's technology industry should increase. When the information technology sectors began to emerge, the industry was highly concentrated in the Silicon Valley and Boston. This happened, Diffley said, despite the industry's capability of being footloose and free to locate anywhere.
Now, the industry and the venture capital that fuels it appear to be spreading out around the country with markets such as Pittsburgh starting to realize their share.
Pittsburgh's Digital Greenhouse effort to create a microchip design industry here and the opening of a Rand Corp. office are great signs for Pittsburgh and reveal the area's potential, Diffley said.
But Pittsburgh has growing to do. Zandi said that if a region has high-tech and financial services firms, it's in good shape. But while Pittsburgh has both, it still is not the center some see it as. He cited Pittsburgh's 6.0 percent financial services employment concentration, which is lower than Philadelphia's 6.8 percent.
Examining productivity estimates in the Pittsburgh region offers hope that the region may yet participate more fully in these golden years.
Pittsburgh's productivity rated 100.4 relative to the other 14 PG Benchmarks regions. Only five regions had better ratings with San Diego and Seattle far outpacing the others. While a rating near 100 represents average performance, the productivity measure is the only economic indicator for Pittsburgh, other than university research and development, in which the region rates above 100.
If the region can expand on its relative success in productivity, it may begin to see its broader economy expand.
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