Picking Up Speed Time's Economists See Healthier Growth in 1994 But Warn That Continued Downsizing Will Slow Job Creation

By John Greenwald

For a President whose term got off to a stumbling start, Bill Clinton is ending his first year in office on an economic hot streak. First he won come- from-behind victories on deficit reduction and the North American Free Trade Agreement. Then came a global trade agreement that may help boost U.S. exports in the long run. And last week the government reported that Americans were buying existing homes at an annual rate of 4.21 million units in November, the fastest pace ever. Now Clinton is about to get a windfall: 1994 is likely to be the year in which the reluctant recovery finally kicks into gear. When TIME gathered six leading economists to assess the 1994 outlook, there was not a Cassandra among them: they foresaw the strongest U.S. growth since the late 1980s combined with continued low inflation and gradually falling unemployment. "I describe my forecast as 'the best of all possible worlds,' " said a buoyant Edward Yardeni, chief economist for the investment firm C.J. Lawrence.

Yardeni's point is that the predictions being made by most economists describe the sort of stable, healthy economy for which Americans have been longing for two decades or more. Few economists see the bogey of inflation or another recession returning anytime soon. In large part that's because of the widespread belief that Clinton will continue to push hard for health-care reform and budget-deficit reduction. As long as he does, interest rates and consumer prices are likely to remain low.

Yet lurking beneath these positive numbers is long-term economic turmoil created by global competition, most notably the now familiar chill of massive and continuing corporate downsizing. A record 600,000 announced layoffs took place last year, a process that shows little sign of abating in 1994. Partly because of such cutbacks, the economy has created only 3 million new jobs since the 1990-91 recession ended, or less than half the number produced in the typical postwar recovery. "This is a very tough-sell kind of economy, and it's going to continue to be so," said Laurence Meyer, an economic consultant based in St. Louis, Missouri, who was named the top forecaster in 1993 in a national survey. "There's a certain sense of struggle, even in this kind of prosperity, that I think makes it unique."

That's because the recovery remains in the throes of two distinct economic cycles, the TIME panel agreed. On the one hand, the U.S. has clearly rebounded from the 1990 slump as low interest rates and the release of pent-up consumer demand have set off a run on such big-ticket items as houses and cars. On the other hand, the payroll slashing that dates back to the 1980s remains in full force as U.S. corporations strive to compete in world markets. Even the boom in business investment, which has boosted economic growth, has gone largely for computers and other labor-saving devices rather than for job-creating new factories and machinery. "The fixation of the moment continues to be on downsizing and cost cutting, whether it's through machines or layoffs, and that fixation remains very intense," says Stephen Roach, co-director of global economic analysis for Morgan Stanley. "I don't think it's going to subside."

Despite such crosscurrents, the U.S. has been growing far faster than its industrial allies and promises to widen the gap in 1994 as both Japan and Europe remain mired in slumps. Yet that could set the stage for stronger U.S. growth in 1995 once Japan and Europe begin to recover and increase their purchases of American exports.

Meanwhile, millions of Americans have spent the early 1990s adjusting to constrained times and now feel they can afford to crack open their wallets and % pocketbooks in 1994. Many consumers who still have their jobs see themselves as "survivors" of one of the worst upheavals ever seen in the work force, the TIME economists said. Moreover, "American workers have adapted to the idea that they're not going to have the same job forever," said labor economist Audrey Freedman, who runs a New York City-based management consulting firm. They have learned to accept the inevitable job shifts, Freedman noted, and are determined to get on with their lives as best they can. Work forces in Europe and Japan have shown no such mobility or adaptability.

Buoyed by this new and cautious confidence, buyers are coming back into stores, showrooms and real estate offices to take advantage of sales and attractively low interest rates. With 30-year fixed mortgage rates now at about 7%, single-family housing starts have returned to the brisk pace of the mid-1980s. The resurgent real estate market has boosted demand for furniture, carpets, appliances and everything else that helps make a house a home. Many consumers have also taken the savings they realized from refinancing their mortgages and are buying new cars at a rate that has led some U.S. car and truckmakers to add third shifts to meet the demand.

The forecasters saw little risk that Clinton's $20 billion tax increase on the wealthy would slow the recovery this year. People whose tax rates jumped from 31% to 36% or 39.6% in 1993 will be able to pay the increase in three annual installments and thus lessen the bite. The economists also said the burden of higher taxes on the economy would be far outweighed by the benefits of falling oil prices and low interest rates. "The tax increase is easily absorbable and is not going to derail the economy," said Meyer.

In spite of their new spending power, bargain-hunting consumers will continue to reshape the retailing industry by flocking to such discounters as Wal-Mart and Price Club at the expense of traditional department stores. That in turn will help restrain price increases even as the economy expands.

The forum expected inflation to hover around a mild 3% in 1994, which will be reminiscent of the price-stable 1960s. The big reason: wage hikes, the main ingredient in most price increases, will stay low as employers continue to cut labor costs. However, Donald Ratajczak, director of economic forecasting at Georgia State University, noted growing signs of labor unrest. "The American Airlines strike may have been a watershed," he said, referring to the Thanksgiving-week walkout by flight attendants, which ended when Clinton prodded the company to seek binding arbitration. "This is the beginning of intensifying wage pressures, or at least demands for retribution in the labor markets."

With inflation under control, long-term interest rates should also remain near their current low levels. For example, mortgage rates that now stand at about 7% might reach no more than 7.5% by the end of the year. But short-term rates, which affect consumer loans and business borrowings, could rise more sharply as the Federal Reserve tightens the money supply to keep the recovery from overheating. David Jones, chief economist for Aubrey G. Lanston & Co., predicted that the prime rate, which banks charge large corporate customers, could climb a percentage point, to 7%. He added that a surge in short-term rates could jolt the stock and bond markets and send small investors scurrying back to dull but safer certificates of deposit.

Panel members expected the quickening recovery to create jobs at an average rate of 170,000 a month in 1994, up from 160,000 last year. But Freedman, a consultant to employers, predicted that the job-growth rate would climb to a more robust 200,000 a month. As in 1993, much of the hiring will probably involve part-time positions and relatively low-wage, service-sector jobs like restaurant work. That should be enough to cut the unemployment rate, which stood at 6.4% in November, to 5.9% by the end of the year.

The economists warned that some Clinton policies could act as a damper on new jobs. Jones noted that many operators of medium-size companies, which have traditionally been job creators, are "close to seething with anger" over proposals the Administration is pushing. Among them: levies on business to finance such programs as job training and health-care reform. Roach called such schemes "nothing more than a thinly veiled hiring tax."

Another important variable is whether recent improvements in U.S. productivity will continue in 1994. Productivity, which measures the hourly output of workers, had increased less than 1% a year for most of the 1980s, hurting U.S. competitiveness. But productivity grew a healthy 1.5% last year, after surging about 3% in 1992, as downsized companies ran their plants and offices with fewer workers.

For now, the economists agreed that the U.S. economy will continue to show solid growth over the next two years. Yet the timing of the economic cycle could cause trouble for Clinton if the aging recovery begins to fade in 1996 when he runs for a second term. "The problem for Bill Clinton is, we're going to have a good 1994 and a good 1995," Jones said. "But look out, Bill, for 1996." However, for Americans who have endured three years of the leanest economic recovery on record, the prospect of two reasonably fat years looks just fine, thank you.

CHART: NOT AVAILABLE

CREDIT: TIME'S FORECAST

CAPTION: GROWTH

INFLATION

UNEMPLOYMENT RATE

With reporting by Bernard Baumohl/New York