Year/lacter/dec28/dt1st/LK2nd

By MARK LACTER

Staff Reporter

It’s the economy that will not die.

Impeaching a president won’t do it nor will bombing raids in Iraq, global financial scares, stock market gyrations, billion-dollar hedge fund bailouts, lower corporate earnings or worries about deflationary prices.

Economists keep predicting a slowdown and a few brave souls even speak of recession but each quarter the numbers defy expectations.

“I would have thought that (a slowdown) would have showed up so far,” acknowledges Robert T. Parry, president of the Federal Reserve Bank of San Francisco. “Normally my estimate would be that we would see weaker numbers next year. But that’s just not obvious at this point because year after year we have been underestimating the strength of the U.S. economy.”

This time, however, it could be different. Really.

The current snapshot, of course, wouldn’t indicate as much: solid growth, low unemployment, practically no inflation, a high level of consumer confidence (strikingly seen on the morning of the House impeachment vote when the shopping malls were jammed), and a stock market that knows no bounds. Considering that the current expansion is more than eight years old, it’s an astounding record. “In our opinion,” notes the new UCLA Anderson Forecast, “the risk of a recession in the U.S. in 1999 is no more than one in 10.”

UCLA is not alone. Business Week’s annual survey of 55 economists nationwide shows only two forecasts that project negative growth for 1999 though the consensus estimate of 1.9 percent growth for the year is significantly below the 3.7 percent pace expected in 1998. Slower growth also is forecast for California and Los Angeles.

But beneath those sunny numbers lies any number of risks that could easily upend the economic balance. By late in the year, even normally upbeat business owners were quietly calculating “What if ?” scenarios in their budget plans for 1999.

“There is some concern,” said the owner of a mid-sized manufacturing business in East Los Angeles. “You won’t hear it at a chamber of commerce meeting, but when these guys get back to their offices, they start thinking worst-case. That’s a very different attitude than the way things were last December.”

One area that’s quickly discounted, however: Washington.

There’s been a striking disconnect between the affairs of state and commerce. The most important person in the capital these days is not Bill Clinton or Rep. Henry Hyde or whatshisname who is about to become the next speaker of the House. It’s the un-elected chairman of the Federal Reserve Board, Alan Greenspan, who will help determine what to do with interest rates, how much to intervene in the world’s economic troubles, and how exuberant to sound about Wall Street’s ups and downs.

When Wall Street traders focused their attention on Washington last Tuesday, it had little to do with impeachment, but rather with a Federal Reserve meeting in which it was decided to leave interest rates unchanged.

Wall Street, of course, has always kept its distance from national politics. Go back 30 years to the riot- and assassination-scarred 1968, arguably this century’s most tumultuous political year, and the Dow Jones Industrial Average wound up with a 4.2 percent gain. Even during the six months in 1868 when Andrew Johnson’s presidency was on the line, the markets rose about 14 percent.

But with Washington spinning out of control in recent months, the disconnect is especially pronounced, especially in California where unless you happen to be a tax attorney or work for a defense contractor the capital seems to be a zillion miles away.

All of which was made perfectly clear on Dec. 17, during the heat of an impending impeachment vote and the unexpected bombing of Iraq. If ever there were an opportunity for the markets to get panicky, this was it. But instead of recoiling, the Dow finished the day up 85 points, while crude oil fell almost 11 percent. Then, on Dec. 21, the first day of trading after Saturday’s impeachment vote, the Dow jumped another 85 points.

So if the impeachment process isn’t enough to strike fear in your average investor or business executive, what does?

Start with Asia. The year ended with some signs of recovery or at least stability in Korea and Japan, along with the conventional wisdom that economic troubles in those two countries were having only limited impact on U.S. industries, most specifically durable goods manufacturers who export their products overseas.

What worries some analysts is that conventional wisdom has proven to be a sucker’s bet. Remember how economists were gushing about Asia’s economic miracle as recently as a couple of years ago? As 1998 ended, it became clear that the region was, at best, a work in progress that a nation’s entire economy cannot be overhauled just because the U.S. Federal Reserve or the International Monetary Fund wills it to happen.

Asia’s troubles, in fact, could wind up hurting the U.S. economy in unpredictable ways.

What happens, for example, if the rash of corporate bankruptcies in Japan leads to bank failures that even the government cannot control? What happens if consumer confidence in that country keeps plummeting? What happens if political unrest engulfs South Korea, which is struggling to overhaul its entire economic system?

Economic models often don’t consider unforeseen events, but many investors do. A recent Gallup survey of U.S. investors commissioned by PaineWebber shows that 51 percent of those surveyed cited Asia as having the most impact on the investment climate by far the No. 1 concern. (By contrast, just 18 percent said the impeachment process was hurting the investment climate.)

It’s not just Asia that’s a cause for concern. The global economy has become so interconnected that it doesn’t take much to set off a firestorm. Just consider the continued anxiety over Brazil, which some economists still see as the next economic domino despite a $41 billion IMF bailout. Here, the problem is political: Brazil’s Congress is not reacting favorably to the belt-tightening measures proposed by President Fernando Henrique Cardoso that would be required as part of a bailout.

Examined in isolation, what happens to Brazil should have little, if any, affect on whether the U.S. economy grows or contracts in 1999 (much less the L.A. economy). Trouble is, these events tend to snowball as was seen last summer when Russia’s near collapse created a crisis at Long-Term Capital Management, a then well-respected hedge fund that found itself badly overextended, with several of its lenders exposed to the tune of billions of dollars.

So serious was the exposure or at least the reaction to it on Wall Street that the Federal Reserve Bank of New York convened a consortium of bankers and brokerage houses to orchestrate a bailout.

Which, in a way, sums up how the nation’s economy is measured these days: How will Wall Street react? The astonishing climb in stock prices has not only made a lot of people rich and the already rich a lot richer it’s created an environment in which expectations keep pointing upward. Pity the fund manager who turns in a single-digit return or the CEO who reports an earnings drop or even a loss (not including, of course, CEOs from Internet companies, whose stocks seem to soar regardless of what the numbers happen to be).

The prospect of a slower economy in 1999 or perhaps a mild recession has some economists pondering how Wall Street will react. Or, more to the point, the millions of individual investors who have been happily spending their entire paychecks, secure in the knowledge that their 401(k)s will keep rising in value. Even last summer’s near 20 percent drop-off in the Dow had relatively little effect on investors because they have been conditioned to expect a sharp, quick turnaround which is precisely what happened last October.

But a recession would hang around a lot longer at least six months during which time investor assets would no doubt start shrinking. And, unlike last summer’s doldrums, they could keep shrinking. All of a sudden, people might hold back on their spending, or even sell off their holdings, perhaps turning a limited sell-off into something more serious.

Full-fledged bulls wave off such talk, but there’s no question that by historic standards, the markets are way overvalued. “It’s very hard to believe these levels are sustainable,” the Nobel-laureate economist Milton Friedman told Forbes magazine this month. He added that “there’s an unattractive similarity with Japan in 1990,” when that market peaked at 40,000 only to plummet to its current level of 14,000.

As if all that’s not enough to moisten your palms, there is don’t laugh the Y2K issue. While untold billions will be spent this year in order to prevent serious computer disruption come Jan. 1, 2000, it’s anyone’s guess what will happen once the clock strikes 12 especially within the federal government, which has lagged far behind the private sector in making preparations. It is conceivable that massive computer breakdowns could create an economic disruption perhaps snowballing into something far worse.

But before you get too nervous about the coming year, it’s important to keep things in perspective. This remains, by most any measure, a remarkably healthy economy, with businesses that are better managed and more efficient than ever before. Most important, it’s an economy that keeps reinventing itself, with ongoing breakthroughs in technology leading to the creation of entire industries. Had anyone heard of e-commerce just three or four years ago?

None of that will change even if there is a recession in the next 12 to 24 months. In fact, it would be a perfectly normal part of the business cycle in some ways, a welcome opportunity to retrench, take stock and finally, when the time is right, to move forward. As the long-awaited countdown begins to the new millennium, what we don’t know can indeed hurt us but perhaps it can help us, too.