Q&a

Growing, slowing, and shifting: Three economists say Maryland can expect growth to continue this year -- but who will grow and where and how fast could change.

January 23, 2000|By William Patalon III

For an assessment of what to expect in 2000, three local economists sat down with The Sun's economic reporter, William Patalon III, to discuss the picture in Maryland and in the nation.

Participating were Anirban Basu, director of applied economics for Towson University's Regional Economic Studies Institute, J. Patrick Bradley; senior vice president and director of economic and investment research for Baltimore-based Mercantile-Safe Deposit & Trust Co.; and Pradeep J. Ganguly, director of the Office of Business & Economic Research for the Maryland Department of Business & Economic Development (DBED).

Let's begin with a quick review of what we've seen in the economies of both Maryland and the United States for 1999.

Bradley: In terms of the economy, you can project back a year ago when most of us were expecting some kind of slowdown in economic activity. That was framed by a concern about what the impact of the Asian economies' financial crisis and the Russian default would have on overall economic activity.

As the domestic economy worked its way through the year and reacted to the lower interest rates brought on both by the Federal Reserve and the flight to quality [when investors take money out of riskier investments and place it into ones that are perceived as "safer" -- such as U.S. government bonds] prompted by Asia and Russia, the U.S. economy was able to grow very, very strongly in most respects in the course of the year and [economists] gradually revised economic forecasts upward.

The Maryland economy seemed to map a similar course.

Basu: The same factors that propelled the economy in 1998 have been in full force in 1999: low interest rates, low inflation, an [active] consumer and an accommodating Federal Reserve [that] for most of the year allowed this economy to continue to run its course full force.

One aspect that we're not particularly clear about is economic productivity. We don't measure productivity particularly well. But we know that productivity growth has been significant. And even the federal government's productivity measurements are beginning to show the impact of software, networking, and computer investments on the U.S. economy.

Those same factors are at play in Maryland and, because Maryland is one of the leading technology states in the country -- certainly in the top 10 -- Maryland has more than fully participated this year in the nation's economic recovery. This should be the second year in a row here our economy, on a Gross State Product basis, will outperform that of the nation.

Ganguly: If you go back to 1998, most of the economists predicted growth in jobs and growth in income to slow down. It didn't happen. In 1999, early on, most economists and consulting firms predicted similar slowdowns in economic activity nationwide and in Maryland. That didn't happen, either. I think 1999, when we have all the data in, it will show that Maryland and the U.S. economy were much stronger than most economists had predicted earlier. Of the two main reasons, one is that I think that we had overestimated the impact of the Asian economic crisis and the global economic crisis that took place. No. 2, I think we underestimated the significance of the surge in the stock market.

In explaining the boom, economists have touched on some different things: technology, productivity, and the "wealth effect." Some think the business cycle has been eliminated. Is that something you think is possible?

Bradley: You never say never in this business, but it just seems, in the history of business cycles, that they reach an end. We eventually move into a recession to correct an excess -- or excesses -- in the economy. What we have experienced at this time, which may be contributing to complacency and even contributing to the question, is the length of the economic expansion. I think that's raised the belief that we can proceed along and that monetary policy-makers can pull strings and regulate the pace of economic activity. If that happens, I think it would be a first.

You need to be concerned about certain excesses that are appearing in our economy. And one of those excesses I would point to would be the expansion of our nation's trade deficit. And that has implications for interest rates, as well as for inflation via currency. So, my response would be, we haven't eradicated the business cycle and that there are appearances [of such excesses and problems as] our trade deficit and our low savings rate as a nation.

Do any of you believe we're in a stock-market bubble right now?

Bradley: At least in terms of stocks, it really depends on the stocks that you look at. Most of the so-called "market" looks overvalued based on projected earnings. But most of the overvaluation seems to be concentrated in a small number of large-capitalization stocks -- principally, technology.

Even though the advance has been concentrated, if there's a major correction, couldn't that be a potentially damaging thing for the economy?

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