THE AMERICAN ECONOMY:
a change in nature?

By: Thierry Coville, Economist in the Center of Economic Observation of Paris Chamber of Commerc and Industry.

The American economy has entered a slowing down phase since the second trimester of 2000. This moderation in growth must not however overburden the fact that we are still in the presence of a growth cycle which is distinguishing itself by its exceptional length: 9 years. This cycle has equally been characterised by an inflation that has remained relatively weak throughout this period, which could well have given the impression that the habitual end of cycle "stop signs" no longer existed. These characteristics of the American cycle have led certain Economists to consider that, in the case of the American economy, the classic growth cycle had disappeared, and that one was now in a "new economy" in which the longer growth phases were alternating with periods of gentle landings. This mutation of the American economy is apparently due to factors such as globalisation, the development of the New Technologies for Information and Communication (NTIC), and a new economic policy. However, if one cannot deny recent structural evolution, it seems still too early to talk of death of the classic cycle. The first factor that incites prudence with regards such an analysis, is that since the second trimester of last year, we are participating in a slowing down of American growth. This means that the "old" business cycle is not over and that the American economy is not uniquely characterised by cycles of expansion without any veritable slowing down phase.

I - Slowing down of the American growth since spring
The slowing down of the American economy has in effect confirmed itself these last months. The Brut interior product (BIP) had very clearly slowed down over the Third Semester 2000, with a rise of 0,5% against an average per trimester progression of 1,3% since the beginning of the year. This movement has pursued itself since, the purchase directors' index for the manufacturing industry and the new orders addressed to the activities section of the services, registering a drop during the second trimester 2000. All the sectors of the economy are therefore affected. The computer industry, motor of the current growth cycle, has registered a perfectly clear piling up of production since the start of the year 2000.
This declaration of activity has translated itself by a less positive orientation on the labour market. Employment growth in the non-agricultural sector, has, in the yearly slipping, been brought back to 2,5% in May and 1,6% in November 2000. Never before had the progression of employment been so weak in four years. Furthermore, we note a reduction in job offers published in the papers. This movement should continue over the next few months. Employment in part-time and data-processing sectors, considered as an advance indicator of the labour force, is in a slowing phase: the progression in total number of employees in these two fields having slipped each year, from 5,7% in September 2000 to 3,7% in November 2000.

The retreat in purchasing power gains has weighed heavily on
private consumption.
Employment degradation has evidently compromised household revenues. This latter has equally been affected by a reduction in purchasing power gains related to inflation acceleration, of 2,2% in average for 1999, to 3,4% in 2000 (over 11 months in annual slipping): average growth of real salary was brought from 1,5% in 1999 to 0,3% in 2000. Moreover, the stock market recession last year led to a reduction in wealth stocks. This decline in revenues from salary and from patrimony intervening in a context of high indebtedness, thereby, lowest income households had their financial situations become increasingly fragile. Personal insolvency began to increase for the first time in two years, for almost 80% of cases, people having revenue inferior to the median family average (officially $50.000). In such an environment, households displayed less confidence and limited their consumption: the progression of retail sales surpassed in volume the 7,3% annual swing and slag of the first trimester 2000, and that of 1,7% of the last trimester 2000.
Exportation weakened also, following notably the appreciation of the dollar's effective exchange rate. Thus one notes a very distinct diminution in new foreign orders since Summer 2000. Confronted with this diminution in their outlets, the commercial ventures began slowing their equipment effort as is indicated by the climaxing of new orders to the equipment goods industry (excepting military material) since the Autumn of 2000. But it is important to note that if growth seems to be moderating itself more strongly than foreseen, the authorities have undoubtedly mobilised considerably in the face of such a situation. In the face of such slowing down and the growing disquiet of financial markets, the Federal reserve, estimating certainly that, in the context of such a large petrol price, the priority was no longer the struggle against inflation, reduced the federal fund rate by 50 base points early in 2001. This decision, which puts an end to the policy of monetary tightening installed in August 1999, means in fact the beginning of a period of détente for monetary policy. The American emission institute disposes in fact of a certain margin for loosening monetary policy. Inflation, although having accelerated since the beginning of the year, remains moderate. The price rise (excluding energy and food products) remains close to its lowest historical level with a progression of 2,6% in annual slide in December 2000. And one notes, moreover, a distinct slowing in unitary salary costs since mid-1998, the very distinct acceleration in productivity gains doing more than just compensating the rise in nominal salaries.
And the same goes for budgetary policy, W.G. Bush having announced his will to lower taxes considerably (1600 billion dollars over 10 years). It's true that, in this field, margins are available since the federal government has registered a budget surplus of 2% of the BIP in 2000. All the same, a certain number of elements could limit the efficiency of such a measure. It shall, first of all, be difficult to have Congress accept, despite its Republican majority, a massive tax reduction. One can thus note that differences of view exist between the new President and the Federal Reserve Governor who feels that its is necessary to use better current budget surplus, for refunding public debt. Moreover, if massive tax reduction is voted by Congress, this could lead to tension on long-term interests, bearing in mind the possible deterioration in the state of public finances. Indeed, such tension could weigh heavily on activity. Finally, the Bush plan foresees that the essential part of this tax reduction should intervene within 10 years, which evidently shall not permit one to face the current activity slow-down.
This slowing down of the economy means, therefore, that the growth cycle of the American economy still has slow-down phases, which goes against the theses of the most optimistic writers of the new economy who were foreseeing almost uninterrupted growth cycles. Nevertheless, this settling down of the activity must not occult the exceptional character of the performances registered over the last years. It is therefore still important to ask oneself whether these results signify that the economy's functioning style has changed radically.

II - The thesis of the New Economy
The length of the current cycle and the weakness of the inflation rhythm during this expansion phase, have led a certain number of observers to evoke the end of the traditional cycle of the American economy. The functioning style of the American economy would thus have profoundly changed and one would have passed into a "new economy". The cycle of the American economy is apparently now characterised by longer growth phases that alternate with gentle landing phases. We are no longer in the presence of cycles in which used to alternate expansion phases of eight years at the most and short phases of strong recession. This change is apparently related to three factor types. First of all, the national economy is evolving in a less cyclical manner than in the past, because of:
- better stock management
- liberalisation intervening in a certain number of sectors (finance, transport, insurance)
- development of new technologies which has induced a hike in work productivity
- growing share of services in production (and the correlated diminution of the manufacturing industry's share, more cyclical).
Second of all, world globalisation has created new markets for producers and new supply centres for importers. Finally, the economic policy has permitted greater cycle stability. Budgetary policy is no longer used as an instrument of adjustment,(1) and monetary policy utilising the preventive strike method has considerably reduced the volatility of interest rates while at the same time struggling successfully against inflation.

III - Some comments on the new economy
In any case, one cannot deny that, these last years, the American economy has known a certain number of structural changes that have permitted to obtain these exceptional results: an exceptionally long growth cycle which has permitted to bring the unemployment rate to its lowest level since the end of the '60s. In particular, results obtained since the Second Semester 1999 are entirely remarkable. During the Second Semester 1999 and the First Semester 2000, growth reached an average 6% per trimester in annual rhythm, in other words emerging economy rhythms. And this dynamism continued to accompany itself with moderate price evolution. The key of these performances has been constituted by very strong productivity gains, labour productivity registering an increase of almost 4,1% in annual decline on average per trimester. In fact, we have been part of a very distinct acceleration in labour productivity gains since the end of 1999, which just reinforces the arguments of the new economy's partisans.

Table 1 - Duration of Expansion Phases after War

All the same, whilst admitting the reality of this evolution, it is inevitable to "relativise" the euphoria inciting speech on the perfect new world of the American economy.

The length and intensity of the Growth Cycle
The current growth cycle is, first of all, exceptional by its duration. According to the National Bureau of Economic Research, the expansion under way started in March 1991. If we take into account the last BIP growth statistics available, the current expansion rate has for the time being lasted 114 months. However, if one bases oneself on the growth cycles calculated by the National Bureau of Economic Research, we are therefore now part of the longest growth cycle since the Second World War. However, it is interesting to observe that in terms of average growth rhythm, we are still a long way away from the average growth rhythms of the '60s. Besides, the current expansion phase is absolutely not extraordinary in terms of growth rhythm.
Thus, if one calculates an average growth rhythm by expansion, in applying the NBER dating, one realises that the current expansion is, with that of 1980-1981, the growth phase that has registered the weakest growth rhythm since the post-war period.

Table 2 - Average Growth of the Expansion Phases after War

One notes furthermore that this expansion distinguishes itself by a particularly weak start-up in terms of growth. This is manifestly the first time since the Second World War, that during an expansion phase, the catch-up growth at the start of the period is so weak (see Graph 1). It is, besides, interesting to examine this lack of dynamism at the cycle's start, with the fact that the recession that preceded it from July 1990 till March 1991 was one of the shortest since the Second World War (only the recession that intervened between January 1980 and July 1980 was shorter). In fact, the cycles of the American economy seem characterised since the middle of the 80s (see Graph 1) by a weaker amplitude in their variations.
The current growth phase is therefore part of a regular trend over the last 50 years that embrace a progressive weakening of the growth rhythms. This type of observation appears to contradict those who think that we registered a very strong increase in the potential growth rhythm or, even further, estimate that we have entered a period of permanent rise in potential growth rate. This cycle therefore doesn't appear in any way exceptional by its performances in terms of growth but rather by its stability. Is that sufficient to evoke a new type of cycle? Nothing is sure about this matter, so indispensable being the historical discretion with regards any experience under way.

How to exit a cycle?
A certain number of interrogations remain to be answered with regards the characteristics of this new type of cycle. In particular, how would the ends of the cycle take place? The proponents of a new cycle type consider that there would be no more recession, but there would be phases of gentle landings. It seems one must remain prudent about this subject. In effect, we don't have enough historical precedent, to be able to pronounce ourselves on this matter. In particular, the current cycle isn't informing us much in this area, since for the time being it has been entirely composed of an expansion phase of about 10 years. Incertitude remains, therefore, considerable, for if the latest information available seems to confirm that a gentle landing is taking place, the risks of a more brutal landing cannot be excluded.
In fact, the veritable novelty of the current cycle is the end of inflation
The weakness of inflationary tension constitutes in fact the most remarkable element of this period of expansion. The "New economy" could thus grow on longer periods without experiencing the habitual recession periods necessary for "cooling down" the economy, making disappear inflationary anticipation, rediscovering growth capacity. All the same, one can, to begin with, notice that the American economy has entered into a weak inflation phase since the early 80s. It's during this period that had been put into place a restrictive monetary policy that contributed to "dissipating" anticipation of the strong inflation of former times. Furthermore, available elements do not permit to conclude there is an indefinite end to inflation. Thus, the inverse relation between inflation and the unemployment rate theorised by the Phillips Curve seems still valid. In fact, structural evolution has surely led to a diminution of the "unemployment rate without accelerating inflation" (in other words, the unemployment rate that corresponds to stable inflation) but the latter hasn't disappeared(2). Besides, a certain number of analyses that integrate as explanatory factors of salary inflation, the inflation anticipation of salaried staff and the gap between the balance unemployment rate and the effective unemployment rate conclude that, in these conditions, the Phillips Curve remains a valid tool for analysis(3). One notes equally that demographic factors such as the larger representation of age groups that traditionally have a lower unemployment rate can also explain the lowering of the balance unemployment rate.
The spiralling of productivity gains doesn't mean that one has passed into a new economy
There is apparently a very strong rise in productivity gains associated with the development of NCTI (New Communication Technology and Information). This argument is in fact the most important one of the new economy theory. The formidable increase in business expenditure for computer material, and for NCTI diffusion, throughout the entire production process has apparently involved a durable acceleration in technical progress and therefore very strong productivity gains. Businesses are apparently now more efficient and from now on would be able to face salary hikes while maintaining their margins. One notes indeed a very distinct acceleration of productivity gains in the United States since the early 90s, the rise in work productivity going from 0,5% at the end of the 80s to 4,8% in the third trimester 2000 (in annual slip). One knows also that the NCTI sector contributes directly to these good performances in matter of productivity. Thus, the electronic component sector has registered an annual average growth in its work productivity, of 9,5% during the period 1988-1996(4). All the same, it is necessary to note that these performances in matter of productivity owe without doubt much to the rhythms of high growth that have been registered. It shall therefore be necessary to examine with care the evolution of the productivity when the growth shall slow down. On the other hand, can one talk of "new economy" whilst current productivity gains remain inferior to those of the early 60s? Finally, this acceleration in productivity gains owes equally a lot to "classic" factors such as the formidable restructuring that have intervened in the manufacturing industry in the 80s.
On the whole, if one admits without reserve that the American economy has undergone profound structural mutation these last years and that have, notably, led to a rise in its potential growth rate. However, it's difficult to go further and to conclude that, under the impact of a new wave of technical progress, the functioning manner of this economy shall have changed completely.

NOTES
1 - It is interesting to note that the wilingness of the new president of the United states of utilising the budjetary instrument for economic revival may put an end to such situation.
2 - Cf. T. Coville, "L'économie américaine : un changement de nature ?", in Les mutations de l'économie mondiale, C; De Boissieu edit., Economica, 2000, pp. 179-210.
3 - A. Brender et F. Pisani, Le nouvel age de l'économie américaine, Economica, 1999, pp. 32-35.
4 - Bureau of Labor Statistics.