South-Western College Publishing - Economics  
Taking Stock
Subject Economic growth
Topic Productivity and Growth
Key Words Productivity, Economic Growth, Unemployment Rate, Inflation
News Story

The U.S. economy has just completed its sixth straight year of economic growth averaging almost 4 percent. In February, the current economic expansion, which began in April 1991, will become the longest in U.S. economic history. Unemployment has been below 6 percent for 5 years, below 5 percent for 2 years and, below 4.5 percent for a year. The core inflation rate is less than 2 percent and measures of labor costs are increasing more slowly than last year. An economy at this late stage of an expansion usually shows signs of splitting at the seams: shortages, or tight labor markets that lead to accelerating inflation and then recession. Perhaps with the exception of the stock markets, there is considerable balance in the economy, reflected by recent data showing the low level of core inflation. Based upon today's economic conditions, economists are providing generally optimistic forecasts for the next few years.

Productivity has been an important element restraining inflation during these past few years. Businesses have continued to add much cost-saving new technology. The added capital should boost productivity even further and improve economic efficiency. Inflation has also been held in check by increased international competition. Even large oil price hikes have not added significantly to the inflation rate.

With interest rates at low levels and the federal budget in surplus, both monetary and fiscal policy-makers appear to be able to handle any significant shock to the economy. Consequently, economists are forecasting slightly lowered growth for the year 2000 with no significant economic downturn on the horizon. This picture could change rapidly if the economy is derailed. Downturns could be produced by:

  • A collapse of the stock market - this could lead consumers to curtail spending and trigger a recession.
  • Foreigners investing their funds elsewhere - this would cause the value of the dollar to fall, raising prices and interest rates.

(Updated February 1, 1999)

1. In the recent past, tight labor markets have usually meant rising labor costs. Product prices and inflation than follow. Labor markets are currently very tight --- are there any signs that labor costs, product prices and inflation are increasing? If yes, what signs would you point to? If not, why not?
2. Suppose as a result of improved economic conditions in Europe, many foreigners sold their U.S. assets and purchased European assets. What would happen to the value of the dollar? What would be the impact of the dollar on imports and exports? On domestic prices?
3. Why would a stock market crash have a depressing effect on the economy? Explain how a significant fall in the value of stocks can lead to decrease in Gross Domestic Product.
Source John M. Berry, "After the Boom, More of the Same?" The Washington Post, January 2, 2000.

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