Expert: U.S. Economy Moving Toward New Record For Expansion Without War

November 20, 1998

CHAPEL HILL - On Dec. 15, the U.S. economy will complete its 93rd month of expansion since the trough of the last recession on March 15, 1991, according to a University of North Carolina at Chapel Hill economist.

"This moves the current expansion into second place on the all-time list, trailing only the 106-month Vietnam War expansion that ended on December 15, 1969," said Dr. James F. Smith, professor of finance at UNC-CH's Kenan-Flagler Business School. "Thus, the current expansion is the longest one in peacetime in U.S. business cycle history.

"Even more amazing, this means that over the past 193 months, the U.S. economy has been in an expansion for all but nine months," Smith wrote in the November issue of "Business Forecast," a bimonthly newsletter he produces for the school. "This is an unprecedented accomplishment and is a major reason why the U.S. economy is the envy of the world."

The nation's mortgage refinancing boom -- a result of mortgage rates falling to 30-year lows recently -- is a major boost to consumers' ability to spend, Smith said.

"This has put billions of dollars of purchasing power into the hands of consumers, as the money previously committed to mortgage payments is now available for other purposes," he said. "The total saving to consumers from this activity is much greater than the 'reverse wealth effect' caused by the decline in stock market prices from their peaks. Thus, it should come as no surprise that two prominent retail associations are predicting that holiday shopping volumes will set new records by a large margin this year."

Almost all housing-related businesses have done well recently, Smith said. Paint and furniture sales are excellent, and the home appliance industry is celebrating its third record year in a row. The carpet and drapery business continues to grow, and home remodeling hits new highs almost every month.

Builders have begun constructing more than 1.5 million new housing units. Existing home sales have set a new record of more than 4.7 million.

"One force behind this that has attracted very little notice is the effective repeal of the capital gains tax on houses for most homeowners," the economist said. "This also provides more wherewithal for consumers to increase their spending.

"Some clever consumers are selling their homes, keeping most of the capital gain and buying another house that needs some fixing up. They improve the new house and, after the two-year legal limit, sell it and start the whole process all over again."

With gasoline prices at their lowest levels in real terms since 1923, consumers "have gone absolutely wild" over sport utility vehicles despite their comparatively poor mileage, Smith said. The high demand for trucks and the solid demand for cars has prompted manufacturers to produce at very high rates during the fourth quarter. Strong vehicle production will add at least 0.75 percent to the fourth-quarter growth rate of the real gross domestic product (GDP), the total value of all goods and services produced in the U.S. after eliminating inflation.

"It was strong vehicle sales that made retail sales in October jump 1.0 percent over September," he said. "Since retail sales are about a third of GDP, this suggests that real GDP growth will continue at a healthy pace this quarter."
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: 962-4266.

Contacts: David Williamson, 919-962-8596, or Dennis Baker, 919-962-0352.

University of North Carolina at Chapel Hill

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