Many UCLA students have a special interest in the 2004 economic
outlook for the United States because it strongly affects their job
prospects. To assess such prospects, it is helpful to examine those
recent developments which will influence most the coming year.
These developments include changes in economic output, national
income and employment.
This century started with the U.S. economy headed for a long and
deep recession. From 1998 to 2000, business firms overbuilt their
inventories and industrial capacity by $210 billion. They also
added $1.3 trillion to their debt, using about one-third of these
funds to buy back shares of their outstanding common stocks. The
buybacks, of course, drained corporate assets, increased the
likelihood of future bankruptcies, and contributed to widespread
job layoffs when the boom inevitably was followed by recession.
By mid-2000, business firms began to reverse their policies and
they cut inventories by $70 billion, and capital expenditures by
$140 billion. Then in 2001, the federal government began to pursue
a counter-cyclical fiscal policy as called for by the Full
Employment Act of 1946. Under this policy, tax rates are increased
during periods of economic boom and lowered in recessions.
Wisely, tax rates were increased in the mid-1990s and lowered in
the 2001-2003 period. As a result, the 2000-2001 recession showed a
decline of only 0.6 percent in real gross domestic products. This
decline was the most mild of the 10 recessions which have occurred
since World World II.
Additionally, the upturn started in the second half of 2001 and
has continued in each of the last 8 quarters. Gross domestic
product has increased from $10 trillion to $11 trillion and
national income by $800 billion since 2001. The interest rate cost
of the federal debt has declined from 2.5 percent of national
income to 1.9 percent, over the past two years.
The employment picture has been much more mixed over the past
two years. In general, large firms were laying off workers, and
small firms were hiring. The number of self-employed greatly
increased. Thus, despite the layoffs of some 3 million workers,
total employment increased by 1 million over two years ago to its
new record-high level of 138 million.
This increase, however, amounted to only 0.7 percent while
output grew by 7 percent. Achieving such a large increase in
productivity was unprecedented. However, business firms, generally
overloaded with debt, needed to cut costs to avoid bankruptcy.
Producing more with fewer workers was a matter of survival.
For students entering the job market, the better opportunities
generally are with small businesses and new firms. Being
entrepreneurially minded can also be very helpful. Possibilities
include developing a new product or one that represents an
improvement over an existing product. Or the entrepreneur may
market an existing product with better service being provided to
gain a competitive advantage.
Additionally, a way may be developed to produce a product at a
lower cost. That is how the founder of the Aluminum Corporation of
America, now known as Alcoa Inc., got started. He invented a method
of producing aluminum at a cost that was substantially below the
prevailing cost. This, of course, greatly expanded the market for
this lighter metal.
To aid in financing, the Small Business Administration will
guarantee bank loans to a small business up to 90 percent of the
loan. Both Apple Computer and Federal Express received part of
their initial capital through SBA. Venture capital firms will
provide equity to new firms in exchange for getting part ownership
of the new business.
The UCLA Extension division offers courses in economics,
accounting and finance that are helpful in starting a new business.
This includes aids in how to prepare a business plan.
With the U.S. economy continuing to show considerable vitality
over the years ahead, there will be numerous opportunities for the
entrepreneur to achieve financial success.
Andersen was a UCLA professor of finance.