NEW YORK-Twenty years ago, her parents-both civil servants-gave Rosanne M. Cahn, chief economist of equities for Credit Suisse First Boston, New York, a cartoon she said aptly describes her profession.
It reads: “What we did is plug in all the variables, assess the trends, define the parameters and then take a wild guess.”
With the benefit of hindsight, Cahn said her past predictions about future economic performance have come in pretty close to on the money. It is reasonable to expect that the U.S. economy can still grow by more than 3 percent in 1998, she recently told the New York Society of Security Analysts.
Even after the financial turmoil manifested itself in Southeast Asia, Cahn said she has “stubbornly maintained my view, with only slight shavings.
“I’m at the top end, on one side of the lunatic fringe, but mine is not a very bold forecast.”
American consumers, the buyers of last resort in the world economy, “will take up a lot of the slack” left by the troubled economies of Japan, South Korea and other Asian nations. In fact, American consumers and producers will benefit from the cheaper prices of goods produced in Asian countries.
“Asia’s troubles mark the end of the excess (manufacturing) capacity story,” she said.
“This could take more than five years (to evolve), but it will mean rational competition because these countries won’t be over-building capacity.” Cahn also said she doesn’t believe the available manufacturing capacity in Asia and the United States will lead to a destructive period of deflation, which occurs when prices and output fall in reaction to a surplus of goods. Instead, she projects a period of disinflation in which prices will rise slower than they have been.
“The Southeast Asia (problems) have been a plus for some companies because they source there,” Cahn said.
Addressing the situation in South Korea in particular, she said, “as a general rule we don’t compete with South Korea because it’s a low-wage country, but some (American) companies, like semiconductor manufacturers, will be affected a lot.”
In the short run, the United States’ current account deficit in foreign trade will suffer somewhat, totaling about 3 percent of Gross Domestic Product in 1998. For perspective, however, Cahn noted that the current account deficit was 3.7 percent of GDP in 1987, the year of the last major stock market crash.
“Human beings are hard-wired to focus on bad news because negatives threaten their survival. They don’t concentrate on the positives,” she said, adding that good news people ignore also affects their survival.
Cahn acknowledged that the crisis in Asia is “pretty astonishing and more widespread in terms of numbers of countries” than were affected when Mexico’s economy hit a rocky road several years ago.
However, there is much strength within the domestic economy to shore it up in these volatile times. The convergence of a host of factors provides that fundamental support, she said.
“Deregulation of financial services, telecommunications and medical care is having a permanent and profound effect on the economy because of the importance of these costs to employers,” Cahn said.
Inflation in the service sector no longer is a function of wages, as it was in the days of regulation, but rather of inefficiencies in operations that continue today but are likely to diminish over time.
However, a tight labor market with low unemployment rates has caused concern among Federal Reserve Board members about possible wage inflation. During 1997, overall wage increases averaged about 3.6 percent, up from 3.3 percent in 1996 and 2.8 percent in 1995.
“There won’t be a major acceleration in wages in 1998 and probably into 1999 (because) workers are too poorly organized to take advantage of their scarcity,” Cahn said.
The Federal Reserve Board might tighten credit by raising interest rates next year in advance of a potential problem with inflation resulting from tight labor markets. Easing of interest rates could occur if there is a major economic slowdown.
“The Feds feel, as I do, that the influence of the Asian crisis, while noticeable, will be minor. Given the Asian crisis, the Feds think it’s terrific that Americans keep shopping.”
Because the cost of capital is cheap compared with the cost of labor, companies are coping with tight labor markets by substituting capital for labor to get productivity gains. As a consequence, “demand for capital goods is booming … and this (forecast) is good till canceled, throughout 1998 and possibly 1999.”
Demand for computers, far and away the fastest growing capital equipment component, grew at a compound annual growth rate of 34.5 percent between the first quarter of 1992 and the end of the third quarter of 1997. Communications equipment demand grew at a compound annual rate of nearly 12 percent during the same period.
In the non-financial corporate business sector, federal Bureau of Economic Analysis figures show that fixed costs are declining as a percentage of sales, and profit margins are rebounding crisply.
For consumers, low inflation and low interest rates have led to “a mini-boom in mortgage refinancings,” that free up capital for other expenditures or investments.
“The ratio of debt to income keeps rising, but debt service to income does not.”
Deregulation of financial markets has resulted in large inflows of personal savings into stock and bond investments. Cahn noted that brokerage fees and gambling combined comprised 2 percent of consumer spending in 1997 and accounted for 10 percent of the growth in consumer spending.
“Financial market deregulation has been a net plus for consumer spending because stock prices have made a round trip down and up and interest rates are low.
“The savings rate has been very low, but the market value of financial assets represents a new high by a large margin, although there is disagreement about whether this is the appropriate manner to save.”
At the same time, investors showed little reaction to the financial market gyrations arising from the Asian crisis, except for a slight shift in the balance of money invested toward bonds instead of stocks.
Similarly, consumer confidence through the first half of December “was barely budged by financial market turmoil.”
In mid-December, according to the University of Michigan Research Center, there was a slight dip “because people thought their jobs might be affected by the Asian turmoil.” However, consumer confidence at year-end is well ahead of its levels as the country rang in 1997.
Securities of the stable U.S. government are in big demand by foreigners, whose investments in these instruments have skyrocketed during 1997.
Calling the current situation in the United States one of “the best income growth and the best labor market” in a good while, Cahn forecast the domestic economy will grow “stronger for longer.”
