U.S. growth limited by slump overseas Economists cite weakness in Japan, Europe

October 06, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- While the U.S. economy is leaving behind three years of painful restructuring and is poised for solid growth, its progress next year could be overshadowed by its trading partners' economic travails, economists said yesterday.

While growth in the United States should stabilize at a respectable 3 percent next year, economists said, Europe will be bogged down in recession, and growth in Japan will be fortunate to reach a meager 1 percent. Speaking at the Conference Board's 1994 Business and Financial Outlook, the economists offered a subdued prognosis for the coming year.

The problem is that as the United States is completing a transition to a more productive economy, the rest of the industrialized world is just beginning the process, said Stephen S. Roach, co-director of global economic analysis at Morgan Stanley & Co. Inc. Drastic increases in productivity, he said, will force record numbers of people out of work, causing worldwide frictions.

"The real rub comes in the labor market," Mr. Roach said. "In a world where unemployment will hit post-World War II highs, tensions will reach dramatic levels. Something will have to give."

What could result, he said, is a move toward protectionism -- already in evidence at home in forces seeking to destroy the free-trade agreement with Mexico and Canada -- and inflation.

Politicians, frustrated by the slow growth, may want to stimulate the economy, a move that could create jobs but also reawaken inflation, Mr. Roach said.

"The question is, does the industrial world have the fortitude to tough it out?" Mr. Roach said. "My gut instinct says no."

Mr. Roach's presentation came after brighter scenarios were offered by several other economists. Focusing on the domestic economy, they predicted that the United States would enjoy low inflation, improving consumer confidence and stronger, if unspectacular, economic growth.

Gail Fosler, the Conference Board's chief economist, said the economy should grow at an annual rate of 2.5 percent to 3 percent for the rest of 1993 and at 3 percent to 3.5 percent in 1994. By contrast, the economy grew at a rate of just 1.8 percent for the April-June quarter this year.

"The outlook is better than we've seen in a long time, but it has no dynamic -- that self-feeding momentum that pushes the economy forward at a steady pace," Ms. Fosler said.

One reason for the economy's slow pace is that companies have been applying technology to reduce costs. Manufacturing costs have increased just 12 percent over the past 10 years, an achievement that has helped make U.S. companies more competitive than their rivals, Ms. Fosler said.

The best measure of that advantage is unit labor cost. Between 1985 and 1992, unit labor costs grew just 1.1 percent in the United States, compared with 1.7 percent in Japan and 2.5 percent in Germany.

"These are the countries that are supposed to be eating us alive, but we're competing," Mr. Roach said.

Indeed, U.S. exports have been increasing nearly 10 percent a year for the past four years, nearly triple the growth of Japanese and German exports and double the average for the largest industrialized countries.

The cost of better productivity is that the current recovery, which started in early 1991, has created about 3.5 million fewer jobs than recoveries typically produce. More than 66,000 jobs are being created a month, but this is just one-third the number usually created.

Ms. Fosler said one reason to be optimistic about job and economic growth is that government policies have changed direction. This year, she said, should be the last one with major defense cuts and large tax increases.

In addition, Ms. Fosler said, the government should start reaping the benefits of lower interest payments: This year will be the first since 1962 when government interest payments will be lower than the preceding year's.

Not all the economists present said they were sure that Washington's policies would favor the economy. Noting that health care reform would probably burden companies with higher taxes and that the deficit-reduction package would probably not be as successful as predicted, Stuart Hoffman, chief economist of PNC Bank Corp., said the economy may be less buoyant than Ms. Fosler predicts.

Just as last fall saw a spurt of growth that tapered off drastically in the first half of this year, growth this fall could be just another irregular blip upward, Mr. Hoffman said.

"I've been saying the same thing for the past year, so I've learned how to say it in many different ways," Mr. Hoffman said. "We are in a slow, sluggish, subdued, subpar, limp, tepid and weak economic expansion."

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