Does the economy seem topsy-turvsy to you? Constant change, corporate downsizing, a whirlwind of economic and technological ups and downs? Think again: Things are really much more stable than they used to be, as Dr. Paul W. Boltz, Chief Economist of T. Rowe Price, points out in a recent investor newsletter.
While the media often focus on bad economic news, such as plant-closings, major corporate layoffs and the like, the truth, as Boltz points out, is that the recent past has seen the most stable economic conditions in modern history. Since 1982 there has been only one recession lasting eight months or longer. There has never been a longer period of prosperity in the United States, going all the way back to the beginning of the modern economy in 1854.
Given the numbers, why don’t we all see modern times as a period of great economic bounty? Part of the reason is the very human desire to remember the past as being better than it really was. We may think of the 1950s as a time of solid middle-class values and job stability, but the truth is that the cycle of boom and bust was much more prevalent then than now. In the single decade of the fifties there were three booms, each followed by a downturn.
Boltz cites three major reasons for the increased stability. The first is that today more people, as a percentage of the work force, are employed in the service sector — as doctors, lawyers, consultants, waiters — and fewer are employed in manufacturing. Service-sector jobs tend to be more stable than manufacturing jobs, as demand for its products — education, meals, entertainment — does not fluctuate as much as the demand for large (and expensive) goods, such as houses and cars, produced by the manufacturing-sector.
Boltz’s second reason for increased stability is that businesses have become better at controlling inventory. There are now continuous streams of small changes in inventory, rather than the less frequent but more disruptive major changes of the past. Lastly, the Federal Reserve Bank has adopted a more stable policy, and does not manipulate interest rates as dramatically as in past times.
As Boltz points out, there will still be a great deal of change affecting individuals as a result of changes in technology and the success and failure of individual companies. But if you care to look at the big picture, it is one of stable prosperity and less economic turbulence than in times past.