It's not economy, stupid; it's the stupid economy Featured

10:01am EDT July 22, 2002

It's not a pretty picture, when one connects the dots linking America's economy to a dismal vista in Asia, South America and Russia-all parts of the globe facing crisis. Add to the composite Clinton's peccadilloes. And finally, how can one burnish a portrait clouded by so many stock market squalls in our own back yard?

The economy, according to the economists, has and will continue to downshift to slower growth. As business and consumer confidence spirals, reach for your rose-colored glasses, if that's what it takes to accentuate the positive. After all, it's not all bad news.

The bottom line is that while nobody knows for sure what's going to happen, there are only so many possibilities. Things are going to either get worse, better or stay the same.

Here are the best arguments for each possibility.

First the bad news

If the economy is going to fall, here's why:

International impasse. The world is a globally integrated economy; like it or not, America is heavily entwined with the problematic legal systems and precarious financial markets of Asia, Russia and Latin America. Those countries have had huge drops in their currency values, making it costlier for them to buy from us, says professor Raj Aggarwal, Mellen chair in finance at John Carroll University. The result is decreased demand for domestic goods overseas.

Volatile stock market. The worsening economies of Asia and Russia have contributed to Wall Street's roller coaster ride. A generally declining stock market increases the cost of capital-which will discourage business investment. The market's bearish behavior also has direct implications on consumer spending.

Corporate profit pinch. "No question about it, 1999 will be a tougher year for businesses everywhere," warns Ken Mayland, chief economist at KeyCorp in Cleveland. Mayland predicts a corporate profit squeeze that will slow capital spending. "The boom as we knew it is over for a while, at least," Mayland declares. "Slower economic growth, increased domestic and foreign competition-which [hurts] a company's ability to get price increases-paying higher wages in a tight labor market, a slowdown of productivity growth-all these things are pinching company profits."

Consumer confidence. The more people hear about trouble ahead, the more cautious they are about spending money. America's consumer confidence has been plunging for several months, says Lungho Lin, associate professor in economics at the University of Akron. "The Composite Index of Leading Theories published by the U.S. Department of Commerce is a good indicator of how people think the economy is going to be," Lin notes. "If it continues to drop as it has in the last few months, people will turn more pessimistic and tighten their spending."

Consumer spending. On top of falling confidence is the fact that the American consumer has been on a buying binge of late. "Consumers are well-stocked up on material goods so they're in a good position to turn cautious without suffering much," Mayland says. "Some will feel a need to rebuild wealth positions by saving from the weekly or semimonthly paycheck. If they save more, they spend less."

Job growth. Recessions in Asia, Russia and Latin America equate to fewer exports and fewer jobs for Americans. The monthly job reports issued by the U.S. Labor Department are indicative of an employment slowdown. "They have been revising them down because every month, things get a little worse than I thought they were going to be," confides an economist with the Department of Labor in Washington, D.C. He predicts we'll see no increase in unemployment rates, but no marked growth either.

Housing sector slowdown. The housing sector is still strong, for now. But the stock market's recent decline has eliminated paper wealth that might have been converted into housing starts.

The wild card of mob mentality. The negativity of the media troubles Aggarwal. "I'm a believer that if people say things are not so good, they'll stop spending and that will affect the economy. Positive psychology will work the same way," he explains. "If people view things as good, they'll spend, and the economy will get a boost."

Now the good news

If things turn out pretty nicely, here's why:

Asia's inherent strengths. Aggarwal points to the fundamental strength of Asian economies, with tax structures that promote growth-generating capital investments and strong private sectors. If Asia can hasten solidification of its financial systems, some Asian economies-Korea, Thailand and perhaps Japan-will begin to recover in 1999. The Japanese economy, even in its current state, is the engine economy of Asia. So when Japan recovers, Asia and our global economy will get a big boost.

Stock market stabilization. The market will bounce back, say the bulls. The decline is only temporary because most investors stay in for the long haul. The stock market will have a minor effect on the economy because the market influences consumer attitudes about retirement, rather than their spending plans for 1999, Aggarwal says.

Lower interest rates, lower taxes. America's budget deficit has been reduced. Government spending has been curbed. With that surplus in mind, why shouldn't the Feds lower interest rates a bit more? Income taxes, too, while they're at it. When tax and interest rates decline, the economy climbs. "That would certainly help the global economy, and your readers would really love to hear that," Aggarwal laughs.

Greenspan influence. The weakened presidency is not a major influence on our economy, suggest some economists. "Thank God Mr. Rubin and Mr. Greenspan have much more of an influence on the economy than Clinton does," Aggarwal says, referring to Federal Reserve Chairman Alan Greenspan and Treasury Secretary Robert Rubin.

Continued growth. "I do expect the economy to continue to grow," Mayland says, "but we've grown accustomed to 3 and 4 percent growth, and for 1999, it's going to be closer to 2 percent growth." Even at that, it's still growth. As of December, this has been the second-longest business expansion on record. A slowdown is inevitable.

Conflicting views. Who knows what will really happen, anyway, with so many conflicting views. "That's because none of us know really what were talking about," Aggarwal jokes, summing it up with a good-natured gibe: "And a lot depends on how the media portray things."<