FOR IMMEDIATE RELEASE
September 16, 1997
Contact:
Patricia Divine
Sarah Hunter
910/759-5421
800/722-1622
Unemployment/Inflation "Experiment" Affects Economy, Says Shoesmith
Winston-Salem, N.C...."Unemployment has become less relevant to inflation," Gary L. Shoesmith reported in the Fall 1997 Quarterly Review, published by the Center for Economic Studies at Wake Forest University's Babcock Graduate School of Management. Shoesmith is director of the center. "Unemployment has now been below 6 percent for three years, but inflation has continued to ease downward, plainly opposite the pattern seen in the business cycles of the 1960s, '70s and '80s," he said.
"The old business cycle--expansion, followed by low unemployment, then an upward spiral of wage and price inflation, followed by the Federal Reserve increasing interest rates to end the expansion--has changed." During the last three years, Shoesmith said, the Federal Reserve has shown surprising restraint, allowing the inflation/unemployment experiment to unfold. "The first thing we have learned from this experiment is that employment below six percent in the U.S. is NOT a flashpoint for wage and price inflation. Unemployment has become less relevant to inflation," he emphasizes, "and if it is relevant, it must be in the context of unemployment and capacity utilization within the United States and our major trading partners.
"With stiff competition here and abroad, many companies are denied the option of increasing prices faster than the competition. In a very tight labor market like we have now, labor costs will keep increasing, very likely faster than prices, which means that profits will suffer unless companies can find other ways to reduce costs through productivity improvements."
In this setting, price competition from abroad will be critical, Shoesmith said.
"There are limits to increasing productivity," he pointed out, "so cost pressure from the labor side is likely to cause higher wage inflation which will then increase price inflation. After that, profits may decline, and short- and long-term interest rates could increase. There could be a possible overreaction in the stock market."
Does this mean the possibility of a recession?
"People believe it's impossible to have a recession because the economy is in such great shape, better than it's been since the 1960s," Shoesmith says. "But if a shock to the economy causes households with income under $50,000 per year (where consumer debt is a continuing trouble spot) to begin retiring debt instead of spending, or if households whose income is above $50,000 are shocked by a downturn in the stock market, the economy could be pulled down."
His advice: "Take advantage of the robust economy, but don't make any financial commitments that can't survive a modest recession in the next few years. Evaluate your capital investments with the idea of a recession before the year 2000."
For the United States, Shoesmith forecasts 2.5 percent growth in the GDP for the third quarter and 2.3 percent in the fourth quarter, increasing to 3.4 percent for the year. In 1998 a slowdown to 2.4 percent is projected.
In the Southeast U.S. for the past two quarters, job growth has continued slightly below the national rate, mostly because of continued losses in manufacturing employment. The forecast projects job growth of 2.4 percent this year and 2 percent next year. Florida will continue to contribute most of this growth, with North Carolina and Virginia adding significantly.
In North Carolina manufacturing employment fell again during the first and second quarters, by 1.0 percent and 0.6 percent, respectively. The good news is that job losses in textiles and apparel are slowing. On a seasonally adjusted basis 2,900 textile and apparel jobs were lost in the second quarter, compared to a loss of 3,200 in the first quarter and 5,400 in last year's second quarter.
The forecast for North Carolina shows 2.7 percent job growth this year with 1.9 percent projected for 1998. Unemployment is expected to remain near 3.5 percent through the end of this year, increasing to roughly 3.8 percent for most of next year.
In the three major metropolitan areas of North Carolina, job growth in Charlotte is projected to be 2.3 percent this year and 2.2 percent in 1998. In the Triad, 1.3 percent growth is projected for this year and 1.1 percent in 1998. In the Triangle, 2.7 percent job growth is expected this year and 2.2 percent next year. Unemployment is expected to remain very low in all three metro areas through 1998: near 3 percent in Charlotte, 2.7 percent in the Triad, and 2.0 percent in the Triangle.
Fairly steady growth has been reported for the first half of the year in five other Southeastern metropolitan areas, including Atlanta, Birmingham, Greenville/ Spartanburg, Nashville, and Richmond/Petersburg. Unemployment remains below 4 percent in all five metro areas
For more information or to arrange an interview with Gary Shoesmith, please call Patricia Divine or Sarah Hunter at 800/722-1622 or 910/759-5421.
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