South-Western College Publishing - Economics  
A Never Ending Story?
Subject Business Cycles
Topic Productivity and Growth
Key Words Economic Growth, Productivity, Real Wages, Economic Expansion, Economic contraction
News Story

The current economic expansion, the longest in United States history, does not as yet show any signs of faltering. Up until this year, prevailing economic wisdom would hold that no one has yet found a way to nullify business cycles, and economic expansion is inevitably followed by contraction. But Martin Baily, chairman of the President's Council of Economic Advisers, issued a statement, "As long as we stick to sound policy, there's no reason why it cannot continue indefinitely."

In explaining his position, Mr. Baily noted that the current cycle is not only unique in its length but also in its strength and attributes. Productivity increases, for example, typically increase at the start of an expansion as businesses make more efficient use of their factors of production. As the expansion continues, productivity growth declines and increases in factor costs translate into increased prices, which eventually slow the economy. Productivity growth in this expansion, however, has continued at a strong rate.

Increased foreign trade has also helped continue the expansion. The increased openness of the U.S. economy has encouraged foreign competition that has helped keep inflation low. The combination of low prices and technological change has boosted real wages and pulled people into the workforce. Technological change was stimulated by increased investment, especially in education, science and technology.

The administration's forecast for the next few years is for productivity growth to slow to 2% from its 1995-1999 average of 2.9%. Consumer spending is also forecasted to slow somewhat. As a consequence, economic growth is expected to fall from the 4.2% growth in 1999 to 2.9%. Growth rates for the remainder of the decade are projected to be between 2.5 and 3.0%.

(Updated March 1, 2000)

Questions
1. What are the four phases of the business cycle? What phase of the cycle best describes the U.S. economy today?
2. How is real economic growth measured? What part does inflation play in this measurement?
3. Increased international trade appears to have been a factor in sustaining the expansion and reducing inflation. What role does imports have in controlling inflation? What role do exports have in stimulating growth?
Source John D. McKinnon, "No End in Sight for U.S. Economic Boom," The Wall Street Journal, February 11, 2000.

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