US-FINANCE: Let the Good Times Roll

By Farhan Haq Reprint | | Print |

NEW YORK, Jul 24 1997 (IPS) - For U.S. corporations, the past has been a week of almost unrivaled optimism: the stock market rose above the 8,000-point level, companies like Pepsico and Philip Morris reported strong profits and the chairman of the Federal Reserve told Congress the good times could last a while.

Federal Reserve Chairman Alan Greenspan had worried last December that the markets were suffering from “irrational exuberance,” in which Wall Street stock prices were increasing in value far ahead of actual business profits. Significantly, he dropped such warnings this week, even though stocks have surged even higher over the past six months – and he instead chose to emphasise the economy’s solid recent performance.

Greenspan told Congress that his agency has revised its forecast for U.S. economic growth this year upward by a full percentage point, and now expects the gross domestic product to increase by between 3 and 3.25 percent this year. Growth is expected to remain above 2 percent next year, and the ‘Fed’ projects inflation to stay between 2.25 and 2.5 percent this year.

Meanwhile, Fed officials have been upbeat that the economy can continue to push ahead with steady growth, low inflation and relatively low unemployment. “The economy as a whole is functioning amazingly well,” Fed Vice Chairwoman Alice Rivlin told Congress this week, and a Fed governor, Laurence Meyer, chimed in that the economy is “enough to make you want to cheer.”

Not everyone finds the data cheering. At some point, said Dean Baker, an economist at the Washington-based Economic Policy Institute, the speculative ‘bubble’ that has resulted in Wall Street’s historic rise above the 8,000-point mark will have to burst.

“It could hit 9,000, or 10,000 or 12,000,” he said. “But ultimately, someone will ask, ‘What are we paying this money for’?”

“From the point of view of the stock market, the signal is clear to keep buying stocks,” said Doug Henwood, author of ‘Wall Street,’ a recent analysis of U.S. investors.

As long as Greenspan is willing to indulge the booming stock market, the Dow Jones indicators could continue to rise, he told IPS. But eventually, Henwood argued, the good times cannot last. “Historically, these things (unchecked market rises) have always ended in fairly dramatic ways.”

Few investors are worried for now of a stock market crash similar to the 1929 collapse which heralded the Great Depression, or even the 500-point fall in 1989 which ended a decade of speculative boom and caused the 1990s to begin in recession. Most of Wall Street’s jitters that the current stock market could be similarly humbled receded this spring after the market lost 10 percent of its value in March and April, only to rebound to even higher levels now.

Yet explaining Wall Street’s tremendous performance has been difficult even for Greenspan. As he told Congress, one possible explanation could be that recent technological improvements, such as the Internet and fiber-optic cables, have dramatically increased U.S. productivity. But the Fed chairman remains dubious about whether the U.S. economy has been shifted to a new plateau thanks to technological innovations.

“We do not know, nor do I suspect can anyone know, whether current developments are part of a once or twice in a century phenomenon that will carry productivity trends nationally and globally to a new, and higher, track, or whether we are merely observing some unusual variations within the context of an otherwise generally conventional business-cycle expansion,” he said.

Behind Greenspan’s phrasing lies a more troubling question: can corporate profits catch up to the surge in stock prices – and if so, who would gain?

“It’s clear that the ratio of stock prices to (corporate) earnings is at a historic high,” Baker said. Either that ratio will level off as returns decrease in the future, or alternatively, profits will have to rise enough to catch up with Wall Street. If the latter happens, Baker argued, “that may not necessarily be good news for workers. The only way profits could rise so high is if wages plummet.”

The economic pie is only so big, the economist contended, and the share that workers have been getting – compared to corporate heads – has already been falling in relative terms over the past decade. According to the Economic Policy Institute, between 1988 and 1996, 1.1 percent of all corporate gross domestic product shifted from wages to profits. Concurrently, median wages have fallen, in real terms, between 5 and 6 percent since 1985, said Baker.

The growth of the global economy may explain at least some of the boost behind corporate earnings, but not wages, he added. Thanks to globalisation, Baker said, “firms are in a situation to threaten workers in ways that they couldn’t do before. Now they can say, ‘Accept a pay cut, or we move your jobs to Mexico’.”

Greenspan has indicated that the one hindrance to the market boom could be if the economic picture for workers actually improves, with lower unemployment and higher wages sparking an increase in inflation. He warned Congress that “imbalances will occur” if the growth of agggregate demand – which has boosted employment and, to a lesser extent, wage levels recently – does not slow down. “Fortunately, the very rapid growth of demand over the winter has eased recently,” the Fed chief added.

For Henwood, the prospect that top economic officials are cheered by signs of slower growth and worried by any developments that could raise wages and employment levels, and thus inflation, is nothing new. But an ever-expanding Wall Street would be news indeed – which is one reason why some economists doubt it can actually exist.