Michael J. Mandel, author of the May 19 Cover Story on how long the economy can keep doing so well, was the guest to discuss his thoughts on employment, inflation -- and the stock market.
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OnlineHost: Welcome to Business Week Online! Good news keeps coming on the strength of the economy -- and the stock market. Can it last? Here to answer is the author of this week's BW Cover Story, Michael J. Mandel (MandelBW), economics editor of BW. Hint: He's optimistic. Jack Dierdorff (JackBW) is the moderator. And now on to your questions!
JackBW: Good evening to all of you on AOL. Hi, Mike Mandel.
MandelBW: Hi, Jack. Glad to be here
JackBW: Mike, the bottom-line question is how long can this good news last? Do you have a fairly quick answer to start?
MandelBW: What we're seeing is a terrific combination of a strong economy, falling inflation, and rising wages. If we're lucky, we could see this combination continue indefinitely. There's no reason why it has to stop anytime soon.
JackBW: Try this question next.
Question: Mike, your Mar. 31 Cover Story on the new business cycle argued that high tech could cause a slowdown. But this week you are arguing that high tech could prolong the expansion. Can you reconcile the two?
MandelBW: Absolutely. In the Mar. 31 Cover Story, what I argued was that high tech had been driving the expansion and would determine which way the economy would go in the future. High tech had become more important than autos and housing. At the time I wrote that story, about two months ago, it looked like high tech was slowing, but since then it surged again. I think that this expansion can continue as long as high tech remains strong. More important, there is no reason to fear that inflation will bring the expansion to an end, as it did previous expansions. We have now moved to a higher plane of growth, much like the '60s.
JackBW: Take this question next from BlueSkyFlr.
Question: Please tell us where you think bond rates will be 3, 6, and 12 months from now based on your views on the massive changes that are taking place in the U.S. economy, especially the fact that the federal deficit may be wiped out next year even without a budget deal.
MandelBW: Let me give you a hint -- economists don't know beans about where interest rates will be in the future. If they did, they could get rich by playing the market. Aside from that, part of the reason why the budget deficit is disappearing is that the economy has remained stronger for longer than almost anyone predicted. As long as the economy remains strong, tax revenues increase and the deficit shrinks. I think that going forward, a lot of the problems that Congress has focused on in recent years -- the budget deficit, Social Security, entitlements -- these problems will be greatly alleviated by faster growth.
JackBW: BBrock1945 has a question that could be an investment corollary to your take on high tech.
Question: Do we invest in high tech, pretty much exclusively?
MandelBW: Good question. High-tech investments will have a higher return than other sorts of investments but also a much bigger risk factor -- who would have guessed in 1993 that the big growth area would have been the Internet or that Apple would be in such big trouble? High tech is extremely volatile and hard to predict -- high returns, high risks.
JackBW: As long as we're on investments, here's a question from BobAB in Teaneck, N.J.
Question: What's your prediction for how much higher the Dow Jones average can go this year?
MandelBW: What we are seeing is a surge of productivity growth in the underlying economy. As long as that continues, the stock market should continue to rise because, fundamentally, the stock market tracks the underlying strength of the economy.
JackBW: This is a related question to your last answer.
Question: How long can productivity increase at the current rate before it hits a wall?
MandelBW: As far as the eye can see. Or, to put it a different way -- in the '50s and the '60s we sustained many years of high productivity growth, followed by two decades of low productivity growth. If we have truly upshifted on productivity, we would expect it to continue for a while.
JackBW: Indae has this question for Mike Mandel, economics editor of Business Week.
Question: Can you tell us the proposed reduction in the capital gains tax, when it may be implemented, and how this may affect the markets?
MandelBW: Good question. But no one knows the answer at this point. No one knows the details. It looks like whatever reduction may be retroactive to May 7. When the capital gains cut actually is enacted into law, there may be a spate of selling to unlock gains, but I wouldn't expect this to have a fundamental effect on the market for more than a few days.
JackBW: BlueSkyFlr is back with a question about the latest currency news.
Question: Please comment on how far the dollar will fall against the yen and what short and intermediate impact this will have on the U.S. stock and bond markets.
MandelBW: Rule 2: Economists don't know beans about exchange rates either, because if they did they could make a lot of money. No one predicted that the dollar would surge so high. Now it seems only reasonable that it will fall, but I'm not sure about this. After all, if the U.S. economy is really getting stronger, that should show up in the currency, so I'd expect the dollar to stay about the same rate with little effect on the markets.
JackBW: RAULZALLES is only one of three who have asked about the minimum wage.
Question: Can you evaluate how the minimum wage increase has helped poverty levels, or whom has it helped?
MandelBW: It's funny about the minimum wage. There was so much storm and fury about how it was going to cost jobs, but now unemployment has dropped to 4.9%, its lowest level in 23 years. Ultimately, this turned out to be the best time possible to enact a minimum wage increase. It's brought up wages for some at the bottom without costing jobs.
JackBW: DannyC4437 in Miami has a very personal concern.
Question: Please comment on the job outlook for a college student next year.
MandelBW: Great time to be looking for a job, with the unemployment rate so low. But keep in mind in recent years, college graduates have not found solid jobs until their mid-20s, on average. To put it a different way, it's normal to bounce around low-paying jobs in the first few years after school before hitting on the career that works. So even if you can't find a great job right after graduation, don't be discouraged -- that's just the way the job market works these days.
JackBW: How about this one from PIERPONT?
Question: Mike, please comment on the gigantic near-monopolistic power of Intel and Microsoft on the international technology scene, and how everybody else seems to be an also-ran. Does this change your realities?
MandelBW: Good question. So far Intel, at least, is intent on making computers as popular as possible, so it can sell as many chips as possible. That means making computers cheaper and easier to use. Microsoft, too, is thinking that way, though not quite as focused. So even though Intel and Microsoft dominate the industry, they still see it in their interest to keep expanding the market, rather than limiting supply and boosting price, like a true monopolist would. So their large market share is potentially worrisome, but not yet a problem.
JackBW: SMITHDLLA has a hard market question -- on timing.
Question: When should one pull out of the stock market this year? Will there be clues to do so?
MandelBW: No. That's almost by definition. Turning points are almost impossible to call. You need to assess your long-term goals. If you are investing for 20 years in the future, don't worry about timing the market -- just invest for the long run. If you are near retirement, now is probably a good time to shift a chunk of money out of the market and move your gains into less volatile investments. It's all in your time horizon.
JackBW: Another investing question.
Question: What part or parts of high tech would you stay away from (as an investor)?
MandelBW: What I would do is find a broadly diversified high-tech fund, which would enable me to reduce as many of the risks as possible while still participating in the gains from high tech, especially the IPO deals.
JackBW: Any thoughts elaborating on DRegan's question, from Eden Prairie, Minn.?
Question: What part does Social Security play in this?
MandelBW: If the rate of growth of the economy really has speeded up, then we will be able to pay for Social Security. All the projections for Social Security running out of money assume a slow-growing economy. If that's not true, the size of the problem becomes much smaller. My bet is on the strength of the U.S. economy and that the baby boomers will find that they do get Social Security when they retire.
JackBW: Back to the yen, via HAYU25.
Question: Are we at any foreseeable risk from a Japanese run on the dollar?
MandelBW: Not at the present time. Why should the Japanese flee dollars for yen, when the U.S. financial system is so much stronger? There are a lot of Japanese banks with big hidden problems -- not so in the U.S.
JackBW: PIERPONT has an almost personal question.
Question: Why do economists have such a devilishly difficult time with productivity numbers? And is this part of the problem? Have your ideas been well received by the profession?
MandelBW: I've been getting more and more positive response on the last few stories that I have done -- a lot of interest from various groups in the government, policymakers and such. I think more and more people are willing to consider the notion that something new is going on. Incidentally, this is all fairly recent. The upsurge in productivity seems to start around the middle of 1995 -- just when an enormous surge in investment in high tech started. The Internet boom seems to mark the beginning of the productivity surge. I don't think this is coincidental. One more thing: The productivity numbers have always been terrible because productivity is very hard to measure. We won't know for years what's really happening now. It's a sobering thought.
JackBW: Mike, what is keeping a lid on inflation -- Greenspan perhaps to the contrary?
MandelBW: Productivity growth is the key keeping the lid on inflation. Faster productivity growth means that the pie keeps getting bigger -- more profits, more wages -- all without inflation. What's amazing is that inflation has actually dropped in the last couple of years. Virtually no one (except BW) predicted this.
JackBW: So why should interest rates be raised, as Greenspan seems to be hinting?
MandelBW: Let me say something nice about Greenspan: He's allowed unemployment to drop far lower than most economists would have, and he's had a lot of faith in the new economy. Now he's teetering on the fence about whether to raise rates. I happen to think it doesn't matter much anymore. The Fed is pretty much committed to the proposition that the economy has changed.
JackBW: Let's shift our sights overseas, thanks to this question from BBrock1945.
Question: How would you compare the European economies to that of the U.S., now and in the next five years? Do you see a European mutual fund as a good investment now?
MandelBW: Let's reverse the order of the questions. Yes, investing in European stocks is a good idea right now, simply because they've been down so long. I'm not sure what will happen to the economies in Europe. Eventually the productivity gain that the U.S. is seeing will spread there, but I don't know how long it will take or whether the single currency will help or get in the way.
JackBW: FLYER59 has a provocative question.
Question: I disagree with the statement that the economy is doing great. Is it not the truth that the the rich are getting richer and the poor are getting poorer?
MandelBW: Actually, as unemployment drops, what happens is that the gains start trickling down to the poor. We are finally seeing wages at the bottom start to rise. But we are seeing definite industry patterns as well. Health-care wages are being hit hard, for everybody from doctors and nurses down to maintenance workers. On the other hand, anyone in high tech is doing well, whether they work in a semiconductor factory, as a receptionist in a software firm, or as a programmer. There's a real advantage to being in a hot area of the economy.
JackBW: Here's the next question.
Question: It's a period of low unemployment, but are there still lingering pockets of suffering where low-tech jobs have ended and the new jobs require new skills -- and new locations?
MandelBW: Yep. If you are willing to move and switch industries, you can do well. The implication: The people being hit the hardest are those near the end of their working careers who are less willing, and would get less benefit, from a big change. These are the people who are being hurt. For everyone else, there's an awful lot of opportunities.
JackBW: MikeMerc in New Jersey wants to relate your thoughts to the big news from Washington.
Question: How do you see the new budget deal? Will it work, or are the assumptions built in too optimistic?
MandelBW: Hah! Budget assumptions are never worth the paper they are printed on. Nobody predicted the big ballooning deficits of the late 1980s. Nobody predicted that deficits in the last couple of years would fall as much as they have. But they made an honest effort to come up with honest projections, and at the end of the day, that's all you can ask.
JackBW: Any thoughts south of the border?
Question: Latin America has been "hot." What do you see happening there?
MandelBW: It seems to be picking up speed, as long as the U.S. doesn't experience a return to protectionism. And with unemployment low and wages rising, there's no reason why it should. And that brings up another point. Low unemployment and rising wages are so beneficial -- in terms of getting people off welfare, helping solve budget and entitlement problems, making it easier to accept free trade -- it's worth the Fed taking a little bit of a chance.
JackBW: PIERPONT has another rather personal question for online star Mike Mandel.
Question: Economists have become the new "stars" on TV -- viz. your Bill Wolman. Has the "dull gray profession" gained this newfound promience because of the productivity of information technology? Don't you all have a more powerful platform to predict from?
JackBW: Including BW Online :-)
MandelBW: I wish...Here's another way of putting your question: Do ideas spread faster than before? Maybe, I'm not sure. From my side, it's easy to get ideas out there -- but hard to convince people. In the new economy, people are just as stubborn as ever.
JackBW: Mitchief has a perennial investing question.
Question: Is it wise to have some gold?
MandelBW: You know, I used to think that gold bugs were crackpots. I'm not as sure as I once was. In the long run, gold is a terrible, terrible investment. But it offers some protection against wild fluctuations in a downturn. My advice: Think about it a bit -- then stay away from it.
JackBW: Mike Mandel, that's all the time we have to quiz you. Thanks so much for being with us.
MandelBW: I'm very glad to be here tonight.
JackBW: We appreciate all the questions from the audience. Transcripts of this conference will be available soon -- look under Talk & Conferences on the BW Online opening screen. Thanks again, and goodnight to all!
Copyright 1997 by The McGraw-Hill Companies, Inc. All rights reserved.
