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Goldilocks economy may live again
By Marshall Loeb, MarketWatch
Last Update: 5:55 PM ET Feb. 11, 2005
NEW YORK (MarketWatch) -- Back at the dawn of the 21st Century, inflation was low, employment was high, growth was strong and markets were up.
Things were going so swimmingly that many economists and investors said the United States was enjoying a Goldilocks economy -- not too hot and not too cold, but just right.
Now at least one of the nation's most influential economists, Princeton University professor Alan Blinder, former Deputy Chairman of the Federal Reserve Board, says we may well be going through the early stages of a Goldilocks Economy once again. He notes that the economy is growing around 3.5 to 4 percent, inflation is down to about 2 percent and falling, and productivity has been expanding about 4 percent annually.
The last mentioned is particularly important.
Until now, the United States has rarely been able to achieve more than 4 percent annual growth in productivity. Signs show a slowdown in its growth later this year. But Blinder expects a longer term pickup. Says he of productivity: "I think we're going through a revolution."
Beyond the key numbers, Blinder sees two big issues ahead this year. First, what, if anything, will happen with Social Security? Second, who will replace Alan Greenspan, whose fifth term as Chairman of the Federal Reserve Board runs out next January, shortly before his 80th birthday.
Says Blinder: "It's the greatest job in the world. Greenspan's shoes are going to be impossibly difficult to fill. What kind of qualities must the Fed Chairman have? He needs a certain unflappability, which Greenspan has in abundance. He also needs flexibility of mind. Greenspan does not lock himself into ideological positions."
Looking still farther ahead, what worries Blinder is that more and more service jobs will become vulnerable to foreign competition. Now he estimates that only 300,000 to 1 million jobs may be lost to outsourcing. But over the coming decades that number will get larger and larger. "Everybody is thinking of competition from China," says Blinder, "But we really should be worried about India for the simple reason that they speak English."
His advice: "We have to change the foci of our school system so that it will turn out people who can get work in America."
Lynn Reaser, chief economist of Banc of America Capital Management in St. Louis, also sees "an economy on a very good footing, doing quite well, starting to approach a comfortable cruising altitude."
She reckons that economic growth in this year's first quarter is running at a brisk annual rate of 4 percent, which is greater than in Europe or Japan. Business capital spending on equipment and software will grow in the United States as companies continue to invest. That will help productivity, which in turn will help overall growth.
She expects to see moderate growth in government spending, helped by some rise in defense spending, and continued growth in housing, supported by low mortgage rates. New claims for unemployment insurance have dropped to the lowest level in four years, she notes, meaning that the employment picture is brightening.
Inflation, says Reaser, seems to be held in check, somewhere between 1.5 and 2 percent. Wage increases are still moderate, and companies, restrained by competition at home and abroad, have only limited pricing power.
As for the dollar, Reaser figures it has dropped about as far as it has to in order to make U.S. goods more competitive in the global marketplace. It has declined dramatically in the last three years: down about 15 percent against all the currencies in which the United States trades, down 20 percent against the yen, 30 percent against the euro.
Still other experts see an economy that's not too hot, and not too cold. Says Sam Stovall, chief investment strategist at Standard & Poor's: "With good economic growth but moderating inflation, it appears we're getting the best of both worlds." S&P economists expect the economy to grow 3.7 percent this year, vs. 4.4 percent last year, and inflation to fall from 2.7 percent last year to 2 percent this year.
As for the investment markets, S&P expects stocks to rise about 7.5 percent this year. Add to that a dividend yield averaging about 2 percent, and you get a total return of 9.5 percent. That's about twice as much as the expected total yields on bonds, which S&P pegs at an average about 5 percent.
Given this picture, S&P's recommended asset allocation for what it calls the average balanced investor is 45 percent in U.S. equities, 15 percent in foreign equities, 25 percent in bonds of 1 to 5-year maturities and 15 percent in cash.
S&P still finds value in both selected large- and small-cap stocks. Some of the areas of the market that the firm currently recommends include companies in transportation and logistics such as Burlington Northern Santa Fe Corporation, CNF Inc., Federal Express and Landstar Systems Inc. In construction-related issues, it favors such companies as American Standard Companies Inc., Ingersoll-Rand Company Ltd. and The Manitowoc Company Inc. In health care it recommends companies in the medical device area and managed care, such as The Cooper Companies Inc., Covance Inc., WellPoint Inc., St. Jude Medical Inc. and Humana Inc. S&P also thinks that selected energy stocks will continue to do well, including Chevrontexaco Corp., Devon Energy Corp., Kerr-McGee Corporation and Nabors Industries Ltd.. Finally, they think there is still potential for selected steel and chemical companies, such as Carpenter Technology Corporation, The Dow Chemical Company and FMC Corporation
Spaf
I only wish that we could trade in the last hour:P. I understand why not and that is life. It is better then the month it use to take or was it a pay period. The companythat took over the TSP are doing a far better job then the onethat started it. 
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