Washington, 25 February 1998 (RFE/RL) -- The head of the U.S. Federal Reserve (Central Bank), Alan Greenspan, says the American economy is doing so well it's time to worry a bit.
"History counsels it is unwise to count on any string of good fortune to continue indefinitely," he told a congressional committee Tuesday.
On the other hand, he added like the good economist he is, "luck is the residue of design."
Greenspan, who chairs the independent authority which oversees American monetary policy, was giving his semi-annual report on the state of the U.S. economy to the House of Representatives. He repeats it today for a Senate committee.
It would seem that the Fed chairman couldn't have had better news to share. In 1997, the U.S. economy (as measured by the GDP or gross domestic product) expanded close to 4 percent -- it's fastest annual increase in ten years. That put three million more Americans onto payrolls and pushed the unemployment rate to 4.75 percent, it's lowest sustained level since the 1960s.
And while wages and salaries rose about 4 percent, fueling impressive increases in personal incomes, inflation fell even further, to one and three quarters percent for the year.
For 1998, he said, the outlook remains very good. Real growth of the GDP should be around 2.75 percent, unemployment will remain low and inflation is expected to remain near the low rate recorded in 1997.
So why worry? Two reasons -- one global, one domestic, but both of interest to the rest of the world.
Internationally, the impact of the Asian financial crisis has yet to register significantly on the U.S. Trade figures for 1997 showed a decline in exports to South Korea, for example, but actually registered increased exports to Malaysia. It wasn't enough time to show what most economists predict -- a rise in imports from Asia because its goods are now so much cheaper.
But Greenspan said that while this dual effect -- reduced buying from the U.S. while increasing selling there -- would have a "discernible drag" on the American economy, something else seems to be happening. Asian exports are such a part of the global economy that they are dependent on the imports they buy from the U.S. and elsewhere.
So while the fall in currency values caused a sharp reduction of imports by most of the Asian economies in trouble, that caused them to curb exports as well, even though their depreciated currencies, should materially increase their competitive advantage.
Greenspan warns, however, that no one has "really figured out exactly how this is all going to evolve...we don't yet have a really useful sense."
On the domestic side, says Greenspan, the concern is the extremely low level of unemployment. On the surface, this is great. Especially since it is part of a healthy increase in productivity, which is the ultimate source of rising standards of living, he says.
American productivity coupled with an incorporation of cutting edge technology into normal work experience at a faster rate than ever in the history of mankind is especially good for the economy.
It has also had "enormous beneficial effects" on the work force because previously low or unskilled workers have been drawn into the job market by demand and have obtained training and experience that will help them even if they later change jobs, says Greenspan.
That means that there have been declines in both those who are officially listed as unemployed, but also those not counted who are not actively seeking work but desirous of working. The number of unemployed not counted has decreased at a rate of about one million per year on average over the last four years, declining to 6 percent of the entire working age population, says Greenspan.
That is the lowest level this group has achieved since official agencies first estimated its size in 1970. However, says Greenspan, unless consumer demand softens or productivity growth accelerates even more, "we will gradually run out of new workers who can be profitably employed." And that could lead to new inflation.
The whole issue of human capital is one that is not well understood, says Greenspan, and seems to be changing. There are now "bottlenecks" in things like on-the-job training and an increase in people going back to school to pick up skills needed to maintain a person's life work.
Still, says Greenspan, the successful pursuit of price stability, while not ruling out misfortune for the American economy, does lower its probability. If companies are convinced that prices will remain stable, they'll reserve price rises for last resort. If consumers expect stable prices, not only will they spend more wisely, but they will save more. Those are good lessons for every economy, he says.