US economy breaks record

The US economy has now set a new record for its longest-ever economic expansion.

The 107 months of growth reached at the end of February - surpassing the 1961-69 boom - have created millions of jobs, thousands of paper millionaires, and scores of happy politicians.

And the growth shows little sign of slowing down.

In the last quarter of 1999, the US economy grew at a torrid annual rate of 6.8%.

Record years for Wall Street

Meanwhile America's buoyant Nasdaq stock market, home to most technology and internet stocks, hit its 13th high this year on Wednesday.

It closed at 4,784.08 after a day which saw a record volume of shares changing hands.

Since 1992, the US economy, already the biggest in the world, has grown steadily, expanding by 37% even after adjusting for inflation, and reaching $9 trillion in size.

It is true that since January, the stock market has dropped by about 10-15%, as investors become frightened that higher interest rates will be required to cool the economy.

But that needs to be set against an increase in stocks of more than 300% in the last few years alone.

Record economic performance

The booming US economy has brought economic benefits right across the income spectrum.

The unemployment rate has dropped by half, to 4%, a 40-year-low, while the economy has created some 15 million jobs.

And the steady growth has trickled down, lowering unemployment among minority groups and - in theory - helping those cut off from state benefits as a result of welfare reform to find new jobs.

However, income inequalities have remained large, as the earnings of professionals and those with a college education have increased much faster than those with fewer skills or education.

The rich have also been made better off because they own stocks, which have increased even faster than earnings, and because of the huge tax cuts made in the Reagan years.

Many US households have also managed to increase or maintain their standard of living by having two partners rather than one working full-time.

Growing budget surplus

The booming economy has reversed the political logic of the previous decade, which was defined by a struggle over controlling a burgeoning federal deficit - by either raising taxes or cutting spending.

The healthy revenues now flowing into the government's coffers have led to projections of a huge government surplus in the next decade, amounting to trillions of dollars.

But that has led to another political conflict.

The Republicans, who control Congress, want an $800bn tax cut to give some of the surplus back to the public, and most Republican presidential candidates want even deeper cuts.

Fed boss Alan Greenspan: opposes tax cuts

The Clinton administration, in contrast, has proposed using most of the money to pay back federal borrowing and to fund social security and Medicare, the government programmes for the elderly that are facing rising costs as the population ages.

The issue could prove central in this year's Presidential election.

Alan Greenspan, the influential head of the US central bank, the Federal Reserve, is also sceptical of the benefits of tax cuts and wants to use the surplus to reduce government borrowing, helping to free up private capital.

The biggest cloud on the US economic horizon is the spiralling trade deficit, which reached a record $300bn in 1999.

At present that is being financed by foreigners who are prepared to pour money into the United States, particularly to buy stocks.

But that could change, especially if the stock market continues to weaken this year, and the dollar could move sharply lower.

That would boost the cost of imports and help fuel inflation, which has already been threatened by higher oil prices.

Mr Greenspan faces a difficult task in trying to slow the boom, and boost the dollar, by raising interest rates - but not moving so quickly that he causes either a recession or a run on the dollar.

That could be made worse by a collapse of the stock market, as people who are spending against their unrealised capital gains on their shares might then cut back their purchases.

The net effect

Some economists believe that, with both companies and individuals carrying high levels of borrowing, there is the potential for a sharp turn-around in the US economy in the next year, as high interest rates begin to bite.

Others argue that the effect of the internet and the rapid adoption of technology by US companies has been to cut costs and boost productivity, allowing the economy to grow much faster than before without an inflationary effect.

Mr Greenspan appears sympathetic to this argument, but he believes that however high the productivity gains the economy will eventually run out of one vital commodity - workers, which will force up wages.

That worry explains why he is prepared to go on raising interest rates further this year.

Almost everyone agrees that the US economy cannot continue to grow as fast as it has been recently.

If Mr Greenspan succeeds in engineering a "soft landing" for the economy, without it falling into recession, then the real economic miracle will have taken place.