U.S. Economy Keeps Up 'Awesome' Performance, UNC Economist Says

April 13, 1998

UNC-CH News Services

CHAPEL HILL -- The U.S. economy maintains its "awesome" performance, and the outlook remains excellent, according to a University of North Carolina at Chapel Hill business expert. Asia's lingering economic crisis should have only a small negative impact on the United States and Europe.

"Our current economic expansion is now embarked on its eighth year," writes economist James F. Smith in the April issue of "Business Forecast," his bimonthly newsletter. "It has moved past the World War II expansion that spanned the 80 months from June 1938 to February 1945 and now ranks as the third-longest period of economic growth in the history of the United States."

In December, the expansion will exceed the 92-month growth period that began in November 1982 and lasted until July 1990.

"That will make the current experience the longest peacetime expansion ever and will move it into second place on the historical record, tailing only the 106 months of the April 1961 to December 1969 Vietnam War expansion," Smith said. "We won't beat that record until January 2000, but it is looking quite likely that we can get there."

Smith produces the newsletter for UNC-CH's Kenan-Flagler Business School, where he is professor of finance.

Financial turmoil that began in Thailand last July and spread to South Korea, Indonesia, Malaysia and the Philippines will reduce only by about 0.5 percent the real gross domestic product of the United States and Europe this year, he said. GDP, which will be affected even less in 1999 and beyond, is the total value -- after inflation -- of all goods and services produced in a country.

The Asian crisis will reduce world economic growth in 1998 only by 0.75 percent, according to the International Monetary Fund, and the largest effects will be on other Asian nations.

The Japanese economy -- the second largest at $4.8 trillion after the United States -- continues to decline slowly, Smith said. A large decline, say 10 percent, would create serious world problems but the odds of that are small.

For complex cultural and political reasons, Japan has hesitated to take steps needed to jumpstart its economy, he said. Its leaders have failed to cut consumption taxes and have spent more on wasteful public works. They also have not allowed hopelessly troubled financial institutions to fail as the United States did, painfully but effectively, in the mid-1980s.

Indonesia -- the world's fourth-most populous country -- remains a mess, in part because of President Suharto's inaction, Smith said. Renewed carnage comparable to that of 1965 is possible.

China's new leader, Shu Rongji, has announced plans to streamline the "incredibly bloated" structure of state-owned enterprises by combining more than 300,000 of them into fewer than 2,000, the economist said. That could throw 100 million people out of work, at least temporarily.

"The great hope, of course, is that these people will either find work in private companies or start their own businesses," Smith said. "If that works out, the burst of entrepreneurial activity should truly be awesome to behold."

If China succeeds in not devaluing its currency again for several years, other Asian countries could return to economic growth more quickly and thereby remove a big worry from financial market participants, he said.

In early May, European leaders will decide which countries of the 15-member European Union will link their currencies Jan. 4, 1999, and use a common monetary unit, the Euro, Smith said. That currency will lead to enormous improvements in efficiency for companies there.

" The monetary straitjacket that is the Euro will result in a competition to shrink government and reduce regulations," Smith said. "This will, over the long run, make European companies much more competitive on the global stage, which is really great news for global economic efficiency. Euroland will have an economy almost as large as the U.S."

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Note: Rated the nation's most accurate economic forecaster by the Wall Street Journal in 1996 and the second-most accurate by Business Week in 1997, Smith is a frequently quoted financial expert and teacher known for his clarity, wit and common-sense approach to economics. He can be reached at (919) 962-3176. As time allows, he's willing to discuss most economic issues with reporters. Fax: 942-4266. Contact: David Williamson

University of North Carolina at Chapel Hill

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