The current economic expansion, now 19 quarters old, has been driven by several underlying strengths. Over the course of 1995, these issues have been discussed here in some detail.
As the year winds down, a review of some key points seems appropriate, since these forces are still at work and should continue to drive the economy in 1996 and beyond.
The first is the technological revolution.
The advance of technology is inducing capital spending and contributing to productivity improvements. That, in turn, contributes importantly to profitability. Indeed, advancing technology is permeating our economy and society, creating new jobs, new businesses, new industries and new lifestyles.
This phenomenon is providing support to the current expansion, should sustain it, is likely to limit the severity and duration of the next recession, whenever that takes place, and should help drive the succeeding expansion.
A second major force under way is the reemergence of entrepreneurship in the American economy and society.
In the 1990s, American businesses shifted their focus to favor stockholder returns and shareholder value as against earlier concentration on size and share of market. That new focus has induced reengineering in American business - better and more profitable ways of producing and delivering goods and services.
There have been associated costs, including job eliminations. But many of the people who lost their jobs have, themselves, become entrepreneurial and have established going businesses. In fact, many new businesses have been created in this expansion.
One reflection has been the record number and dollar amount of initial public offerings over the past three years. Another manifestation of renewed entrepreneurship has been the advent of bonus payments and incentive compensation to workers throughout the chain of command right down to the factory floor level and the equivalent in services.
Incentive compensation has motivated workers to focus on their own performance and their companies' profitability, thereby enhancing productivity and profitability. Deregulation has also reduced the constraints imposed on businesses, large and small, thereby creating an atmosphere more conducive to expanding economic output.
A third force at work has been the reduction of government spending, especially for defense, and the redeployment of those resources to the private sector, especially for private sector investment.
In our capitalistic, market-driven economy, it follows that an increase in relative share of gross domestic product by the private sector at the expense of the government sector will induce higher productivity, more profits and greater vigor in the economy. In our view, the strength and duration of the expansion has occurred, not simply despite the reduction in defense spending, but because of it.
The same can be said of corporate reengineering. All of these forces have been under way simultaneously and have been mutually reinforcing. They have all contributed to low inflation, higher productivity, and American competitiveness abroad. These factors should help support the expansion in the months and years ahead, provided that consumers are able and willing to sustain their normal pattern of spending and barring major policy mistakes.
An important consequence of these forces has been the shift by investors to financial assets - bonds and stocks. That new preference arises out of lower inflation, lower inflationary expectations, good and sustainable profitability, and a widening belief that the U.S. economy is underpinned by an economic and political system that is supportive of business and conducive to continuing economic growth.
We look ahead to 1996 with optimism.