CHAPEL HILL -- Every second, minute, hour and day that the current U.S. economic expansion continues it will set a new record, and not until May, 2002, will the nation experience a recession, a University of North Carolina at Chapel Hill financial expert predicts. Never before has the economy grown over such a long span without a downturn.
"Some analysts and commentators have become so accustomed to growth for so long that you are again beginning to hear talk about the 'end of business cycles' or that there is no reason to worry about the economy having any severe problems," said Dr. James F. Smith. "This is very dangerous talk and is bound to be wrong. The business cycle has not disappeared."
Seeds of the next recession already have been sown, he said. The economy is in such good shape, however, that it will rebound the following year and grow again for another decade.
Smith, finance professor at UNC-CH's Kenan-Flagler Business School and chief economist for the National Association of Realtors, was the nation's most accurate economic forecaster twice in the past four years, according to The Wall Street Journal. He described the national and world economies in the March issue of "Business Forecast," a newsletter he writes for UNC-CH.
During the current economic expansion the value of all stocks traded in the U.S. has increased by $11 trillion as measured by the Wilshire 5000 Index, the only major stock index calculated in dollars, Smith wrote.
"This enormous increase in wealth has resulted in a lot of realized capital gains," he said. "The taxes on these gains were nearly $100 billion in 1999. That was a significant contribution to the budget surplus."
Because any stock price is just the discounted present value of its stream of expected earnings, interest rate increases lower stock prices because they raise the discount rate, Smith said. That is why analysts keep a wary eye on the Federal Open Market Committee, which sets monetary policy.
"Of course, what investors have learned over the past 20 years is that whenever stock prices decline is a good time to buy," he said. "From 1901-1999, the average annual rate of return to owning stocks has been 13.5 percent a year. It's too bad all of our parents, grandparents, and great grandparents didn't put every penny they could find into stocks and of course bequeath them all to us, the current generation."
It seems unlikely that the 21st century will produce results this extraordinary, but the secret to investing success is to buy a variety of stocks or a good mutual fund and hold them for the long run, Smith said. Being a day trader has never been wise because commissions take such a big share of gains.
"The outlook is really incredibly good right now," he wrote. "Consumers are positively euphoric with both the Index of Consumer Sentiment compiled by the Survey Research Center of the University of Michigan and the Consumer Confidence Index compiled by the Conference Board hitting new all- time record highs in January."
That confidence is based on record employment, record disposable personal income and relatively low inflation, Smith said. Consumers know jobs in most areas are plentiful and easy to get, and they know wages and salaries are good. At the same time, productivity grew at a 5 percent annual rate in both the third and fourth quarters of 1999 and rose 2.9 percent for the year. Unit labor costs fell at an annual rate of 1 percent in the fourth quarter.
"In manufacturing, productivity growth was an astounding 10.7 percent at a seasonally adjusted annual rate in the fourth quarter and was up 6.4 percent for the year," Smith said. "That was the highest growth rate since 1971."
Reports of unsustainable aspects of the economy are rare. Energy prices are the only ones rising rapidly, and those will soon decline, he predicted. Companies have learned how to raise profits by reducing the amount of working capital tied up in inventory.
The recession he predicts for 2002 will result in a decline in real gross domestic product of 0.3 percent, similar to the 0.2 percent decline in 1991, he said. After that, the economy should rebound in 2003 and grow at a healthy 3.5 percent a year until 2013.
"That's a pretty good outlook," Smith said. "The best is definitely yet to come."
Note: Smith can be reached at (202) 383-1184 or (919) 962-3176. As time allows, he's willing to discuss most economic issues with reporters. E-mail: jsmith@realtors.org Fax: (202) 383-7568.