How good can it get?

Kiplinger's Personal Finance Magazine, Jan, 1998 by Melynda Dovel Wilcox

Americans are enjoying the lowest unemployment rate in 28 years, the lowest inflation rate in 34 years, record levels of investment by businesses and a clear shot at the first budget surplus since 1969.

It doesn't get any better than this.

And there's no reason to think it will get much worse. Chances of a recession in 1998 are as low as they've been in years. Nearly every region of the country is thriving. Consumer and business confidence is at the top of the charts.

Ed Kalbach figures that 1998 "will be the best year ever" for his business, which makes top-of-the-line sports accessories. EK Ekcessories of Logan, Utah, racks up annual sales of $5 million on small-ticket items: $7 designer eyeglass retainers and watchbands and $9 lanyards -- just the kinds of things that appeal to consumers who want a taste of luxury without paying a lot of money. Even if the economy turned down, Kalbach thinks "people would still buy stuff for fun."

For confident consumers David and Evelyn McKee of Punta Gorda, Fla., money wasn't a problem. They bought a used 43-foot Morgan sailboat without taking on a penny's worth of debt. "Because of the stock market and real estate appreciation, we've seen a tremendous increase in our net worth," says David, who retired from Ford Motor Co. at 54 and now runs his own consulting business. "We felt comfortable walking in and paying cash," for a boat that they plan to sail around the world.

Even if 1998 doesn't quite measure up to the economy's stellar performance in 1997, it can't help but be a very good year:

* Growth will be strong but slower, falling from about 3.5% in 1997 to around 2.5% in 1998. Consumer spending, which makes up two-thirds of the economy, and business investment, which accounts for another 15%, show no signs of faltering.

But the strengthening of the dollar relative to other currencies as a result of recent events in Asia will make U.S. goods more expensive abroad, slowing export growth and acting as a slight drain on the economy. U.S. export markets would also be hurt if a number of major Japanese banks were to fail.

Don't be alarmed if you hear reports that retail sales fell short of industry expectations over the holidays. Many consumers are shopping via the Internet or shifting their holiday spending away from malls and traditional retail outlets and into entertainment, travel and adult enrichment, buying such things as golf lessons and theater subscriptions (see the "Good Life Index," on the facing page).

* Unemployment will stay at rock bottom. There's not much room for the jobless rate to drop further, and in 1998 it's likely to move slightly higher, from its current 4.7% to just above 5%. With unemployment as low as 2% in some parts of the country, companies that want to relocate are heading for the few remaining pockets of surplus labor, such as rural areas of North Carolina that once relied heavily on the tobacco and textile industries.

* Prices will inch up. Food prices should remain under control, and so should the cost of energy -- provided tensions in the Persian Gulf don't escalate. The strong dollar will continue to hold down import prices.

Look for the consumer price index to rise 2.5% for the year, up from 1997's estimated 2.2% rise. The 1998 rate would be around 2.7% if not for a change in the way inflation is measured. Adjustments to the CPI -- including an updated basket of goods and services and a new procedure to ensure that computer prices reflect that buyers are getting more bang for their buck -- will shave about one-tenth to two-tenths of a percentage point off the reported inflation rate.

The wild card on the price front is health care. Managed care and other cost-containing policies may have squeezed out as much savings as possible, and there's concern that price hikes are bound to pick up speed sooner or later. Because health insurance makes up such a large chunk of many employers' labor costs, even a mild acceleration could result in higher consumer prices for goods and services.

* Borrowing will be cheap. By choosing not to raise rates in the face of a robust economy -- a move that could bring on a recession -- Federal Reserve Board chairman Alan Greenspan "has taken very small risks to let the economy feel its way to a lower unemployment rate," says Charles Schultze, chairman of the Council of Economic Advisers during the Carter administration and a senior fellow emeritus at the Brookings Institution.

Even if the Fed decides to take out "inflation insurance" in the form of higher rates, any increase in short-term interest rates in 1998 is likely to be so small that it won't have a dramatic effect on the economy. Volatility in world financial markets could send the yield on 30-year Treasury bonds bouncing around, from as high as 6.5% to below 6%.

A BRAVE NEW WORLD?

Such a long stretch of remarkably good economic times -- seven years and counting -- has economists and professional forecasters scratching their heads. Among the fifty or so prognosticators who are members of the National Association for Business Economics, the consensus view has overestimated inflation every year since 1991.