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Press Briefing by Laura D'Andrea Tyson Chair, Council of Economic Advisors

January 28, 1994

1:14 P.M. EST

MS. MYERS: Dr. Tyson will talk about the new GDP figures and then I'll follow with any questions you might have. So, Dr. Tyson.

DR. TYSON: Good afternoon. I will read a statement and then answer questions.

We've just received a very good report card on the economy for the fourth quarter of last year; real GDP increased 5.9 percent, which was the best quarterly performance in six years. The expansion was broad-based; it was led by intrasensitive spending. Business equipment spending in 1993 was the fastest for any year since 1972. Growth was entirely generated by the private sector, government spending continues to shrink. At the same time that we've had the strong growth performance, inflation remains low. Indeed, we are now enjoying the lowest inflation in a generation. If you put all these things together, the report suggests the economy is squarely on a path of sustainable growth. There's a clear linkage between the President's economic program introduced last year and the economy's improved performance. Our deficit reduction initiatives have contributed to a sharp decline in long-term interest rates. And those lower interest rates, in turn, are bolstering private spending. With inflation remaining low and continuing improvements in the deficit, we expect long-term interest rates will remain relatively low and help to sustain our economic growth.

Q: Laura, how close do you think the economy is to overheating? And do you think at some point a move by the Fed to nudge up short-term rates would actually help by reducing inflationary expectations and keeping yields down --

DR. TYSON: Well, first of all, I think that what makes this report such a good report is a combination of strong growth and continued good news on the inflation front. If you look at indicators of inflationary pressure, or if you look at actual inflation performance, you see an economy which is on a growth path which seems to be consistent with inflation remaining tame. And so I don't see anything in this report or anything in underlying inflation indicators -- for example, unit labor costs, which are declining, or productivity, which is increasing dramatically -- which would suggest that inflationary changes are likely to heat up in the near future.

Q: Would you address why the quarter was two points higher than the year as a whole and two points higher, for that matter, than the year you expect ahead?

DR. TYSON: Well, actually the Bureau of Economic Analysis in its -- one of its releases did indicate the estimate of a couple of special factors which were at play in the fourth quarter. First of all, the effects of the flood, which in this quarter, in the quarter -- last quarter of 1993 -- added something to GDP growth.

And the BEA estimate was about half a percentage point. The BEA also estimated another effect for us -- we've said all along that what was an important factor in the fourth quarter -- likely to be an important factor -- was a very strong auto production schedule, the strength of which was in part based on a relatively slow production schedule in the third quarter. BEA estimates that effect at 1.5 percentage points. So if you take that -- those two effects together, those two special effects for the quarter -- are around two, suggest that the economy otherwise would have been growing in the high threes in the fourth quarter. So there were a couple of special effects at play.

Q: Could I take another stab at the first question? Even though the inflation data were very favorable looking in this report and in other recent reports, a lot of economists are saying that with the kind of growth momentum we now have, we are soon going to start straining industrial capacity, straining labor markets, outgrowing the economy's long-range potential to the point that wage and price pressures will start to emerge; and if you wait until they actually start showing up, it's too late, therefore better for the Fed to go ahead and do something now. What about that proposition?

DR. TYSON: I think that it is important to monitor the underlying indicators suggesting what inflation fundamentals may be doing in the economy, and that is what we are doing. We don't see in the numbers that we have available right now any change in inflation fundamentals. Now, it is certainly the case that those kinds of comments you are suggesting are really sort of suggesting that sooner or later something will happen, and then sooner or later, policy may be changed. But all I'm saying is that right now in looking at the evidence we have, we don't see it sooner. That is, it's not in the numbers that are currently there.

Q: What do you think now looking back the whole year, since there is a strong fourth quarter growth, about the necessity as you claim at the time of the stimulus program that was rejected?

DR TYSON: Well, it's interesting to us to point out, I guess, that we did an economic forecast, our first economic forecast which came out just about a year ago with the President's budget, forecast a fourth quarter-to-fourth quarter growth rate for this year of -- of 1993 of 2.8 percent. That is what the economy actually did if you do fourth quarter-to-fourth quarter growth in 1993 -- it did 2.8 percent. If you do annual growth, it did 2.9 percent.

We also, in our own internal calculations -- which I remember speaking about in this room -- suggested that if the stimulus package had passed, the economy might have grown instead of 2.8 percent at 3.1 percent. Remember, the stimulus package was an insurance package, and it's easy enough after the fact to say that the insurance wasn't necessary. But that isn't how one purchases insurance; you purchase insurance in the face of uncertainty. And a year ago, I remember very clearly, that what the feeling about the economy was that it was uncertain -- that the recovery had been a see-saw recovery; business confidence and consumer confidence was not high; there was real concern about whether the economy in that state could absorb the beginnings of deficit reduction. So, it was an insurance package which would have had a small, positive effect on growth rate. And just, interestingly, from our point of view, the growth came in exactly where we thought it would have been without the stimulus. But the stimulus might have bought us a little more, and was certainly sensible as an insurance strategy.

Q: Looking out over the coming year, some economists are cautioning that the trade deficit is going to expand even more rapidly than it did this year and we might have a trade deficit of -- some people have said $160 billion, 170 billion. Do you think those

estimates are reasonable? And what do you see -- what effect do you see that having if that's so on our growth rate this year?

DR. TYSON: Well, our growth -- first of all, let me say that our forecast projections for this year and continuing over the budget window will be made available with the budget next week. We anticipate the economy will grow over the year in the range of three percent. And, of course, we've taken into account in that forecast anticipated changes in both our export markets and in our import demands. I think it's important to emphasize that we do anticipate this year that the world in which we sell our exports will expand at a faster clip in 1994 than it did in 1993 -- that we've looked at the trade -- GDP, world GDP numbers, facing the U.S. And those are going up this year to about 2.9 percent growth, and the rest of the world's GDP weighted by our trade shares with the rest of the world.

It is certainly the case that if we continue to grow more rapidly than the rest of the world, that by itself is a cyclical factor that tends to cause a weakening of the trade imbalance. On the other hand, U.S. competitiveness, price competitiveness and quality of goods competitiveness is very strong. And then finally, I just say that that three percent takes this factor into account.

Q: Can you talk a little about the relationship between job market growth, job growth and growth of the economy --

DR. TYSON: Okay, yes. We've looked at this on an ongoing basis for the last year. The question was about job growth and output growth. We have looked at this on an ongoing basis. And what I would say our reading is -- we have not yet incorporated the latest numbers since we just got them last night -- but our reading up to the latest numbers -- and we don't think it will change because of the latest numbers -- is that employment growth is more or less in line with output growth over the period of, first, economic recovery from the '91 recession, and now economic expansion. Employment growth may be a little on the low side of the average performance, but it's still within range of normal or average performance for the U.S. economy during expansion phase. Now, that is subject to a calculation we did with an estimate of yesterday's growth rate, which is slightly lower than what the growth rate came in. But I don't anticipate that to change fundamentally.

So the bottom line here is what happened this year is as the economy -- think about the output growth rate this year. It's been accelerating quarter by quarter -- output growth has been accelerating quarter by quarter -- and what has happened this year is that we've had a strong enough output growth year on a rising trend of growth, that we have gone from really what was a period of jobless recovery to, I would say, expansion with job creation. That's the transition which has occurred. And but the job creation that has occurred is consistent with the economy's pace of sustained expansion.

Q: Have you -- made a forecast on how the earthquake or the bad weather is going to affect growth in the first quarter?

DR. TYSON: We have not made an official calculation of this yet. So all I would say is that one might anticipate that the earthquake effect this quarter would be a negative effect. One might -- the weather is a little harder to call. It depends on how much longer this goes on, because we can make up our spending from one week in ice-bound houses, but if it's two or three or four weeks, it gets harder to make up during the quarter. The point is that the weather phenomenon is occurring early enough in the quarter that there's time for people to make up for spending that they would have done earlier in the quarter. The earthquake effect is likely to show up as a negative number this quarter, but we have not done the calculations yet on the grounds that one knows roughly how to do the

calculations, but I think it's important to get a sense of the actual extent of the damage before one does the calculations.

Q: You say the President's economic program has direct linkage to the improved performance of the economy. How much credit does the Bush administration deserve for what Republicans would suggest is the fact that they left you a strong, robust economy to begin with and that you are simply taking advantage of the inheritance?

DR. TYSON: Well, I wouldn't say that we inherited a strong, robust economy; and I wouldn't say so based on a number of factors. First of all, I think that if you look into the performance this year versus last year that you have a much more broadbased strength in economic indicators. You have strong household confidence. You have strong business confidence. You have strong spending on business plants and equipment which, as I say in my statement, is growing at the fastest pace since 1972. You have a turnaround in commercial structure investment. We have had as a -- a situation where the ability of the economy to generate employment -- in fact, we've emphasized a lot, is that job creation on a monthly basis by the economy in 1993 was twice the rate as 1992. Now, in order to get a sustained economic recovery, you've got to generate jobs so people have incomes and they feel more confident about the future and they will consume more. Consumption spending was very strong in the fourth quarter as well.

The last thing I would say is, we did not believe that the economic recovery that one could measure in 1992 was sustainable. It was based on a flawed or a cracked, to use a earthquake metaphor, fiscal foundation. It was not sustainable. The ability of the economy to grow in a sustained fashion over time is going to depend upon the fiscal foundation on which it rests. And that was simply a cracked foundation.

Q: So do they deserve any credit?

DR. TYSON: I think that what I would say is that during the period of recovery that began when the recession ended in '91, there was a period of -- called balance sheet adjustment -- whereby the private sector did improve its debt position. And the improving financial soundness of the business sector, the banking sector and the household sector certainly is something that has helped the economy grow in 1993. I think that was a process that households and businesses were going through, and that was a very beneficial process. I wouldn't relate it to any particular policy of the previous administration, but I do think it's a foundation for this period of economic expansion.

Q: Ms. Tyson, yesterday the CBO was talking about unemployment in the area of 6.4 percent. What would the reemployment plan that Clinton has proposed do to the unemployment figure and fully phase in -- how quick -- if you just use their forecast, how quick could you see that number coming down?

DR. TYSON: Well, first of all, their -- I might emphasize that we have not yet issued our new forecast on unemployment, which we will do next week. I want to emphasize that the reemployment efforts of the administration are -- that there are a number of ways to think about unemployment, and there are a number of ways to think about the reemployment program. Some unemployment and an important part of unemployment is a cyclical phenomenon. That's really what I was getting at before in the question of what's the relationship between output growth and job growth. Now that the economy has picked up pace steadily over '93 -- and we believe we're on a sustainable growth path in the range of three percent, then we expect that the economy will be generating jobs at a faster clip -- and we've seen in in 1993 -- than it did in 1992. So we're well on

course for the 2 million jobs a year estimate that we suggested at the beginning. Last year when we gave out our budget plan and our economic forecast, that's what we forecast. That will bring the unemployment rate down, according to our forecast, gradually by itself. It's a cyclical recovery phenomena -- cyclical expansion phenomenon.

But there are other issues involved in creating jobs and helping people who are unemployed. There are many people, as the President has said, who are not going to be called back to their old jobs. Even as the economy expands, the nature of the jobs out there, where the jobs are occurring, the skills that are required to take those jobs -- all of those things are under change. And so the reemployment program is meant to help people transition from one job to another; to help them to achieve the skills that they need to get a better job; to help them get off of the unemployment rate faster -- it will help the economy absorb people faster.

Q: -- affect the gross figure or, I mean, the percentages so much as maybe the human --

DR. TYSON: It can affect the pace at which the unemployment rate declines, and also -- and I would say as important in some ways -- is what kinds of jobs people get. That is, we need to think, as the economy's in a period of expansion, we want to do as much as we can to enhance the economy's ability to absorb people quickly, but also to absorb them into high-paying jobs quickly. And that's really part of the change in the structure of jobs and the skills that they require.

Q: boiled down to, like, it will reduce unemployment by .2 percent or --

DR. TYSON: No, and I don't think that actually is a good way to think about it because I think that way really underrates this very important other part of the program, which is really to increase the quality of jobs. It's not just the number of jobs, but it is very importantly the quality of jobs.

Q: Dr. Tyson, in this climate of economic expansion, what is an acceptable unemployment rate in the administration's view?

DR. TYSON: -- an acceptable -- we would like to -- let me just go back to what I said a minute ago. We right now have the economy coming down gradually to an unemployment rate in the range of 5.5 percent in 1998. That's what our current forecast is. I don't expect, although that is our mid-session review forecast, and we are going to issue a new one next week, I don't expect that would change very much.

Now, I think that the notion of reemployment policies and improved training policies and improved education policies might be over the long haul to see if we could move the unemployment rate down even more. But also at the same time, to increase the quality of the jobs we give people. Right now there is among, discussions on this a lot of emphasis is put on the number of jobs. And I just want to make sure that in the discussion we also get the quality of jobs in.

Q: But there is no demarcation? There is no number where --

DR. TYSON: There is no -- no, these programs are not designed around what is, you know -- no unemployment rate is acceptable in the sense that we would like everyone who wants a job to have jobs available to choose from and good jobs available to choose from. We know that market economies will always have some unemployment, but we certainly want to do everything we can to bring

it down as low as we can without, of course, getting into the overheating problems that came up before and at the same time, while trying to really raise the quality of jobs. If you look at the problems of the economy in a longer-term perspective, what I think is a major problem has been the very slow growth of middle incomes of -- income per capita of wages, of employee compensation and also the increasing disequalization or gap between wages and incomes at the bottom and those at the top. Those are things that all have to do with the quality of jobs and employment prospects.

Q: So what do -- how do hope to get out of the job summit to --

DR. TYSON: Jobs summit -- what do we hope to get out of it? I hope we get out of it the exchange of understanding of both the different causes of unemployment problems; the different causes of the kind of quality of job problem I'm talking about; the different causes of how to -- of difficulties workers may have in transitioning from one kind of job to another kind of job; and then to learn about what works and what doesn't work by having a comparative exchange of information with other countries who have looked at the same kinds of problems that we're looking at.

MS. MYERS: Let's take one more.

Q: Why does the administration want to get rid of the targeted jobs tax credit --

DR. TYSON: We're looking at a whole new way of trying to deal with the training and job creation efforts of the administration. So this is really an attempt to develop a whole new way of thinking about how better to train and move people into employment.

THE PRESS: Thank you.

END 1:35 P.M. EST

William J. Clinton, Press Briefing by Laura D'Andrea Tyson Chair, Council of Economic Advisors Online by Gerhard Peters and John T. Woolley, The American Presidency Project

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