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The U.S. economy, just off a spectacular 1999, is poised to confound the pessimists again in 2000. By rapidly increasing their productivity, American businesses are making it possible for the economy to run faster than its erstwhile speed limit. Growth has averaged more than 4% for the past three years, yet inflation has been dormant. In 1999, consumer prices rose just 2.2%, even though oil prices doubled.
Expect more good news in 2000, as companies find new ways to produce more with less. Standard & Poor's DRI, a unit of BUSINESS WEEK's publisher, The McGraw-Hill Companies, predicts that the inflation-adjusted gross domestic product will grow a healthy 3.6% in 2000, while the consumer price index will rise just 2.3%. (Measuring from fourth quarter to fourth quarter, DRI predicts GDP growth of 3.1% and inflation of 1.9%.)
To see how the U.S. economy keeps defying conventional economic theory, talk to people like William R. Johnson, chief executive of Pittsburgh-based H.J. Heinz Co. (HNZ) Strong economic growth is putting upward pressure on Heinz's personnel costs. Says Johnson: ''I continue to worry about labor costs and the difficulty in attracting and maintaining talent.'' Big pay raises would solve the problem, but Heinz prefers other options. One solution: Heinz is centralizing its five U.S. operations in Pittsburgh. That will improve retention because Heinz can transfer executives between divisions without uprooting their families.
Productivity growth comes down to working smarter, not harder. Budget Group Inc. President David N. Siegel, a veteran of Continental Airlines Inc., says companies in the car-rental industry are investing in computer systems for managing prices and inventory so they can make fuller use of their fleets. Says Siegel: ''I think you're going to see the same sort of improvement over the next three to five years in the margins of this industry that you saw in the airline business.''
Every bit of efficiency helps, because the U.S. economy is bumping up against resource constraints. Most in demand, of course, is labor. The national unemployment rate of 4.1% in November--the lowest since 1970--masked such heartland unemployment levels as 1.7% in October in Cedar Rapids, Iowa, and 2.8% in Columbus, Ohio. ''This is labor's time,'' says Kenneth T. Mayland, chief economist at Cleveland's KeyCorp bank.
The betting is that Federal Reserve Chairman Alan Greenspan will manage to keep inflation under control in 2000. But to do so, analysts predict, the Fed will impose more rate hikes this year--possibly in February, then in March--on top of the three quarter-point increases laid on since last June.
Unless the Fed overreacts, however, its rate hikes should not inflict serious punishment on the economy. Helped by the efficiencies of the Internet, productivity growth has been dramatic and is expected to continue. DRI, for one, expects nonfarm output per hour to rise 2.2% this year--not as good as 1999's likely 2.8% but still well above the average of the past quarter-century. Gains in efficiency should dampen inflation pressures and let the Fed stick with its policy of tweaking instead of braking economic growth. DRI expects healthy rises this year of 4% in personal consumption and 10.6% in capital spending, both rates down modestly from 1999.
BLOWOUT. For many sectors, 1999 will be hard to beat. Still, 2000 should be a good year for everyone from retailers and drugmakers to securities firms and metals producers. Software should have a blowout year. Even the Y2K computer glitch is apt to have little effect on the economy, say most economists. There were fears that output would plummet in the first quarter because of inventories accumulated against a Y2K disaster. But the stockpiling hasn't occurred. ''We are blessed,'' says Carl B. Weinberg, chief economist at High Frequency Economics Ltd., a Valhalla (N.Y.) economic advisory firm.
In some hot industries, forecasted growth rates are simply staggering. Merrill Lynch & Co. expects U.S. sales of networking equipment to shoot up 22% this year. Yankee Group Research Inc. projects that the number of U.S. wireless communications customers will climb 21% this year, to 105 million. ''This industry is the most exciting I have seen in a very long career,'' says AT&T (T) Chairman C. Michael Armstrong. Falling prices are triggering an avalanche of new business. Says Armstrong: ''This industry will be not only one of the largest but one of the fastest-growing for a long time.''
That's not to say everyone will be a winner. The obvious candidates for a pinch are interest-rate-sensitive sectors that will be hurt by Fed tightening. Already, housing sales are slowing in response to higher mortgage rates. The National Association of Home Builders expects that existing-home sales could slip 8%, to 4.77 million units, in 2000, while new-home sales drop perhaps 5%, to 860,000. Higher lending rates are also expected to reduce car and truck sales. After selling some 16.7 million vehicles in 1999, carmakers may move just 16.1 million this year, figures Diane Swonk, chief economist at Chicago's Bank One Corp. (ONE) That would still equal the second-best year in history.
Those slowing sectors are the exceptions. Overall, the danger is that growth will be too fast, not too slow. Staffing up to meet rocketing demand is getting ever harder. Merck & Co. (MRK), faced with a shortage of neuroscientists, recently bought Sibia Neurosciences Inc. in La Jolla, Calif., in part because it couldn't get enough top U.S. talent to work at its lab in Britain. Manpower Inc. (MAN), the Milwaukee temporary staffing giant, trolls for talent in social and professional groups, synagogues, and churches. It sponsors luncheons with recruiters as speakers and even makes charitable donations for each worker found. ''There is no relief in sight,'' says CEO Jeffrey A. Joerres.
Perhaps the most consuming concern for forward-looking corporate chiefs will be cyberspace. ''The Internet will continue to grow at fantastic rates,'' says John A. Roth, CEO of Nortel Networks Corp. (NT), the big Brampton (Ont.)-based communications equipment maker. ''The e-commerce wave will transform the way people in virtually every industry do business.'' Forrester Research figures online sales to businesses and consumers in the U.S. will more than double this year, to about $330 billion, and could nearly double again in 2001. ''The U.S. is in hypergrowth,'' says Varda Lief, a senior analyst with Forrester.
IMBALANCES. Economic growth in other countries should continue to rebound. Europe could see an uptick in growth, from about 1.8% in 1999 to 2.6% this year, as it adjusts to monetary union, says Standard & Poor's DRI. The forecaster expects the Asian powerhouses outside of Japan to grow about 4.6% this year, about the same as in 1999, while Latin America grows about 2.8% after shrinking 0.6% last year. The worst drag will be Japan's domestic market. Although the government has raised spending and pushed short-term interest rates toward zero, weak banks aren't lending money. Worse, government loans to troubled companies are delaying much-needed consolidation. ''The real solution of tough restructuring is being put off,'' says Akio Mikuni, president of credit agency Mikuni & Co. DRI expects Japan's GDP to gain only 0.3%--even less than last year's 0.7% rise.
The combination of strong growth in the U.S. and weaker growth elsewhere will increase trade imbalances. After climbing 40% last year, the U.S. trade deficit could rise 23%, to about $430 billion, this year, DRI warns.
It's disappointing that world growth isn't better balanced. But the U.S is doing its part to keep things humming. For the U.S. economy, the ceiling is nowhere in sight.
By Joseph Weber in Toronto, with Steve Rosenbush in New York, Amy Barrett in Philadelphia, and Brian Bremner in Tokyo
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