UNC-CH Expert Says U.S., N.C. Economies Foing Fine

March 17, 1997

UNC-CH News Services

CHAPEL HILL -- In other parts of the world, including Japan and Europe, economic conditions worry observers, but it is difficult to find any forecaster troubled about the United States or North Carolina, a University of North Carolina at Chapel Hill expert says.

"Hardly any analyst is projecting a recession in 1997, and those few that are should change their tune over the next six months," said Dr. James F. Smith, professor of finance at UNC-CH. "While a few more economists expect a recession in 1998, they are still a very tiny minority. As time goes on, more and more forecasters are coming to agree with me that the best bet for the next recession is in 2002."

Smith discusses the current U.S. and N.C. economic outlook in the latest "Business Forecast," a bimonthly newsletter he produces for the Kenan-Flagler Business School.

If the current expansion continues, he says it will become the longest in U.S. history in February 2000. Already in fourth place, it will move into third this December and into second in December next year.

Nationally, unemployment remains well below 6 percent, and a record 63.5 percent of the population aged 16 to 65 are employed, which is the highest proportion among the world's wealthiest countries. Two-thirds of recent employment growth has been in industry/occupation groups paying wages above the median, according to the President"s Council of Economic Advisers, which means most new jobs have been good ones.

"Industrial production is also at the highest levels ever recorded, but there are no strains on capacity," Smith says. "Business fixed investment has been very strong for the past few years, and this seems to be showing up both in increased productivity and in rising profits."

Congressional passage of fast-track trade authority for President Clinton would allow the U.S. trade representative to negotiate agreements to boost exports that would further strengthen the economy, he says. Another productive action would be to pass the Economic Growth and Price Stability Act, which would make price stability the only goal of the Federal Reserve System, make inflation illegal and thus lead to lower interest rates.

Still other moves Smith recommends as smart would be to balance the budget in fiscal 1998, repair the broken Medicare system, act now to avoid bankrupting the country through Social Security, replace the income tax with a national sales tax and streamline burdensome federal regulations estimated to waste between $600 billion and $1.3 trillion yearly.

"If the Congress can accomplish these seven goals in 1997 and 1998, the outlook for the U.S. economy for the next century would be considerably enhanced," he says.

While the U.S. unemployment rate hovers in the healthy 5.2 percent to 5.4 percent range, North Carolina has been hitting 3.8 percent, he says. Not surprisingly, that robust unemployment rate is coupled with record personal income.

N.C. personal income ran at a seasonally adjusted annual rate of $165.65 billion for the third quarter of 1996, an increase of almost 9 percent from the 1995 third quarter and well above the national increase of 5.76 percent. "The state seems well on its way to another significant budget surplus," Smith says. "This will probably go into a rainy day reserve fund in case we get any more hurricanes in 1997 or 1998 like Bertha and Fran in 1996.

"The only serious problem facing North Carolina is the state of our elementary and secondary education systems," he says. "The community college system could well be the best in the nation and our system of colleges and universities is outstanding."

Spending on each pupil in N.C. elementary and secondary schools has quadrupled since 1950 after adjusting for inflation so that inadequate funding does not appear to be the problem.

"A better place to look is in the explosion of non-teaching personnel to the point where in 1997, we have about one such person for every teacher," Smith says.

One solution would be to give parents vouchers for education and let them send their children to any school they choose, he says. That would bring competition to education and should quickly improve results.

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Note: Smith, one of the country's most frequently quoted financial experts and a teacher known for his clarity, wit and common-sense approach to economics, can be reached at (919) 962-3176 (w) or 968-8433 (h). As time allows, he's willing to discuss most economic issues with reporters.

Contact: David Williamson

University of North Carolina at Chapel Hill

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