The Economy

Dec. 21, 2004
A decade of continued success.

As I begin my third decade of writing this column for IndustryWeek, it seems appropriate to offer some general projections of how well the U.S. economy will fare during the next decade. To put these figures in perspective, consider the thumbnail synopsis of the performance of the economy during the last five decades. All figures are average annual percentage changes.

Real GDP Inflation Employment Real profits Stock prices
1950s 4.1 2.4 2.0 2.8 14.2
1960s 4.4 2.3 2.8 3.3 5.5
1970s 3.2 6.6 2.8 2.3 0.5
1980s 3.0 4.7 1.9 1.3 12.1
1990s 3.0 2.2 1.8 6.7 15.2
We have heard so much about the spectacular performance of the economy in the 1990s. Yet it turns out that adjective applies mainly to the stock market; the gains in real GDP and employment were lower than in the 1950s and the 1960s, while the rate of inflation merely returned to those levels. The gain in profits occurred primarily because interest payments decreased, not because income from capital rose relative to income from labor. Except for exogenous shocks, I see no reason why the economy cannot remain at full employment and low inflation indefinitely. In that case, the real growth rate will equal the rate of productivity growth plus the growth in the labor force. I put these figures at 2.75% and 1.25% respectively, which means real GDP should rise an average of 4% during the next decade, substantially higher than the average rate of increase during the 1990s, although not the late 1990s. With a continued slight decline in the length of the workweek, employment should rise about 2% per year, which will lead to the creation of 25 million new jobs during the next decade. In spite of the remarkable recovery in profits since 1982, the sum of profits plus interest payments has remained stable at 14% of GDP since that date, a relationship that I expect will hold for the next decade. With little change in interest rates, that means profits will rise at the same rate as GDP, which is 6% in current and 4% in constant prices. The 4% figure would be a full percentage point above the performance of profits during the 1950s and 1960s, when labor did make some small inroads into profit margins. But for the next decade, I expect the ratio of labor/capital income to remain unchanged. In recent weeks, we have heard forecasts ranging from Dow 3,600 to Dow 36,000. If the market is currently in equilibrium, then one could perhaps argue that stock prices and profits will rise at the same 6% per year. However, I forecast that broad-based stock prices will rise about 10% per year and the Nasdaq composite will rise about 20% per year in the next decade. That would put the Dow near 30,000, and the Nasdaq composite about 22,000, a decade from now. The key to rapid growth, low inflation, and soaring stock prices in the long run is the same as in the short run, robust gains in productivity. Hence my forecast depends on the assumption that productivity growth will rise almost 3% per year. If that growth rate were to retreat to the 1.5% rate that started in the late 1970s and continued for almost 20 years, inflation and interest rates would rise, and stock prices probably would not advance at all in the next decade. However, with the Internet revolution just getting under way, rapid productivity growth in the years ahead seems to be the most reasonable assumption. (Editor's note: Evans recently received the prestigious Blue Chip Economic Indicators award from the New York-based Manhattan Institute for the most accurate cumulative U.S. macro-economic forecast for 1995 through 1998, besting more than 50 other leading economists).Michael K. Evans is president of the Evans Group and professor of economics at the Kellogg School of Business, Northwestern University, Evanston, Ill. His e-mail address is [email protected].

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