Global Economy Continues to Grow

Good economic times should continue, Dr Lawrence Chimerine said at the Truck Trailer Manufacturers Association Convention in Indian Wells, California.

Virtually every region of the global economy is in better shape than it was a year ago, said Chimerine, managing director and chief economist for the Economic Strategy Institute. In addition, the weak areas in the world are improving. This should continue for at least 18 months and probably longer before there is any significant risk of a global economic downturn.

Chimerine reported on current conditions and the outlook for major geographic regions around the world. His assessment included the following: * Asia. Every nation in the area is experiencing firm economic recovery, he said. The recovery began about a year ago. Consumer spending, rather than just exports, is helping to trigger the recovery. Some countries are reforming their banking systems. However, Chimerine said the process is slow and that it will take years for the region to make up the ground that it lost during the past recession. Short of a major downturn in the US economy that would reduce Asian exports to the US, however, Chimerine expects the expansion in Asia to continue. "The only modest concern in Asia I have is Japan," Chimerine said. "Japan is taking two steps forward and one step back. While the trend continues to be up, Japan is the only country in the world whose economy is not performing to expectations." * Latin America. Brazil is on a sharp economic upswing after a significant six-month contraction. Argentina appears to have bottomed out, as have Colombia and Venezuela. Mexico is doing extraordinarily well. * Middle East. The oil-producing nations of this region, as well as Russia, are growing because of increases in oil revenues. * North America. Canada and the United States are continuing to move forward with well-balanced economies. "The pessimists simply have been wrong," Chimerine said. "One of the reasons they have been wrong is that they continue to use the old rules of thumb about how the US economy works."

How Much Longer? Over the last 150 years, the average expansion cycle has lasted five years. The current economic expansion is more than nine years old.

"There has been a trend toward a dampened business cycle in this country," Chimerine said. "Recessions come less often, and expansions last longer. When recessions come, they are much milder than they used to be."

During the past 150 years, the US has had 30 business cycles. The three longest expansions have been in the past 30 years-during the 1960s, the 1980s, and the 1990s.

"Those such as Alan Greenspan who make economic policy have to be aware of these changes," Chimerine said.

Chimerine believes the five-year business cycle is a thing of the past and that the current prolonged economic boom will continue. The economy is defying historical patterns because several factors have combined to change the fundamentals of the economy.

"This economy has the potential to keep growing at a healthy rate for at least two or three more years and maybe longer without a traditional economic downturn," he said. "Some of the structural factors of the US economy have changed that much. If no unexpected event or policy changes (such as an excessive interest rate hike by the Federal Reserve) occur, we should have several more years of prosperity ahead of us." Chimerine disputed the distinction many make between the old US economy and the "new" one. The entire economy is new, which is one reason he expects economic growth to continue.

"Everything is new," he said. "No one does things the way they did five years ago. Companies that do not change go out of business."

A Changing Economy Chimerine said it is valid to distinguish between those who create technology and those who use it or to classify some markets as growing and others as mature. But analysts go too far when they use the terms "old economy" and "new economy." The concept of old and new economies implies that certain parts of the economy are exempt from the changes that have transformed the nation in recent years, he said. These changes include: * Intense global and domestic competition. Effects on how individuals run their businesses include the need to make products stand out from those of competitors, increased importance of customer service, and limits on the ability to raise prices. "Today, if you are not one of the industry innovators, if you don't regularly improve your products, and you aren't holding the line on your prices, you will not survive in this highly competitive environment," Chimerine said. * Deregulation. This has helped make the first factor more intense. Deregulated industries include airlines, utilities, telecommunications, and financial services. "Deregulation has had a powerful effect on the US economy as an anti-inflation force," Chimerine said. * Discount chains. Stores such as Wal-Mart, Home Depot, and Office Depot have changed the balance between buyers and sellers in many industries, Chimerine said. * Technology. * Demographics. "We are in the middle of one of the biggest demographics changes in US history," Chimerine said, pointing out that the median age in this country will increase four years over the next decade. The distribution of income and wealth is expected to shift, and family composition will continue to change.

Can't Raise Prices All of these factors are having profound influences on consumer goods and services, Chimerine said, not the least of which has been to make raising prices increasingly difficult.

"Lack of pricing flexibility and power now characterizes virtually every industry in the United States," Chimerine said. "It has flip-flopped the inflation process. We used to raise prices when costs went up. Most industries can't do that anymore. They have to figure out ways to keep costs under control. That is why wages have been stable in today's tight labor market. Companies can't increase wages because they know that they can't raise prices. And if companies miss earnings projections by a penny, it's possible for their stock prices to drop 25%."

Chimerine says companies are coping with these economic changes by: * Implementing technology. Every company is looking at technology to keep costs under control, improve productivity, quality, and delivery. * Thinking globally. Many companies are looking for opportunities to do business internationally. They also are seeking overseas suppliers. "In a price-constrained environment where economies of scale are more and more important, companies frequently must operate globally," Chimerine said. "Those companies that don't operate globally are at a competitive disadvantage." * Demographic opportunities. Chimerine believes the demographic changes impacting customers may provide an opportunity to increase business. Companies should ask themselves what changes they should implement to make their marketing strategies more appropriate and how they could better serve customers that are being affected by these changes. "First and foremost, how can we maintain or improve profitability in an environment where we cannot raise prices?" Chimerine asked. "How can we make every part of the business more efficient?

"This combination of new technology, the inability to raise prices, and pressure from Wall Street to meet earnings expectations together are responsible for this productivity revolution," Chimerine said. "If you can't raise prices, you have to become more productive. The company wins because it becomes more productive, and the consumer wins because prices remain low. In my opinion, we are only in the early stages. We are not using the Internet and other technologies anywhere near their maximum potential."

Primary Concern The one concern Chimerine has about the economy is the prospect of the Federal Reserve raising interest rates excessively. The Fed is arguing that the economy is growing too rapidly, in part, because of the money people have made in the stock market.

Chimerine said that the Fed has a history of over-tightening even after the economy slows down. The recent spike in oil prices also has caused disproportionate concern about inflation.

Chimerine does not believe the economy needs higher interest rates. However, at the time of his presentation, Chimerine expected the Federal Reserve to raise interest rates a total of one-half percent by the end of June. The economy, he believes, can handle the increase-but not much more than that. He cites the housing industry, where sales have flattened out. Interest rate hikes, combined with the effects for higher gasoline prices, may be sufficient to slow the economy to the Fed's desired level. To get an idea of what the economy will do, Chimerine concluded, watch what the Federal Reserve does. o

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