Success, for Bill Clinton, can’t be an economic miracle-a fact that he understands all too well. “It took us a long time to get into [this mess],” he said on the campaign trail, “and we won’t get out of it overnight.” Will the public accept that? Allen Sinai, chief economist of The Boston Co., thinks so. “For once, none of the candidates felt pressed by the voters to offer a quick-fix program on jobs,” he says. “That shows long-run rather than short-run thinking.”
It remains to be seen which of his many good intentions Clinton plans to move on first. He arrives in office tagged as a man who changes sides faster than a windshield wiper. But if Americans are indeed willing to tolerate a slow expansion, the president-elect has some running room. And you have time, too, to consider how-and whether-to change your personal financial plans.
As far as the economy is concerned, you might as well try to race a turtle as to prod this expansion into a higher form of life. Stimulus will be applied, but “it won’t be excessive because the money isn’t there,” says economist Tony Riley of A. Gary Shilling & Co. Individuals and corporations haven’t yet recovered from the borrowing binge of the 1980s. “This is terrible time to be elected,” says David Levy of the Jero Levy Economics Institute, who describes the 1990s as a “contained depression.” If Clinton does very well, Levy concludes, “the economy may be crummy instead of awful.” Sinai, not so pessimistic, sees several years of growth around a modest trend of perhaps 2.5 percent annually-slightly higher than if Bush had been re-elected. The forecasting firm DRI/McGraw-Hill is guessing 2.8 percent. Here’s the money outlook:
Clinton starts out with a read-my-lips promise of his own: no tax hikes on individuals with incomes under $150,000 and couples under $200,000. He’s probably talking only about tax rates. He has said he’d close some loopholes and raise Medicare premiums for the 2 to 3 percent of older people with incomes over $125,000. Tax cuts, if passed, will go to middle-income people or the working poor. But they won’t get much-maybe $55 to $150 per family. Given the size of the deficit, is it worth it?
Anyone earning more than $200,000 should plan on a 36 percent federal income-tax rate (up from 31 percent today), plus a surcharge on incomes topping $1 million. You can’t entirely dodge this bullet, but neither do you have to take it straight in the heart. To cut taxes on earnings, put as much of each paycheck as you can into tax-deferred retirement savings accounts, such as Keoghs and 401(k) plans. To protect interest and dividend income, deferred annuities (especially if you’re middle-aged), tax-exempt municipal bonds or muni-bond mutual funds. High-quality five- to 10-year munis are currently yielding around 6 percent. That’s the equivalent of 8.3 percent in the 28 percent bracket, 8.7 percent in the 31 percent bracket and nearly 10 percent if the bonds also free you from state and local taxes.
Here’s an idea for a Clinton play in municipal bonds, from Ian MacKinnon, head of fixed-income investing for the Vanguard funds: buy high-yield (higher-risk) muni-bond funds. Even a modest economic pickup will strengthen junk bonds and hike their price. At the same time, increased demand for tax-exempts is putting the entire muni market up.
Last winter President Bush tried to boost the economy by reducing the income-tax payments that are automatically withheld from your paychecks. As a result, most Americans have been getting an extra few dollars a month. Now it’s payback time for the 68 percent of taxpayers who normally get tax refunds. Your refund could drop by up to $172 for people withheld at the singles rate and $345 for those withheld at the married rate. So you won’t have quite as much money next spring, to spend or save. You may even find that a small tax payment is unexpectedly due. This will hurt consumer spending and may slow the economy again.
The modest fiscal stimulus Clinton plans won’t generate many extra jobs in the next four years-by Sinai’s count, only 100,000 more than Bush would have produced. The jobs lost in corporate downsizing will not come back, and the bloodletting isn’t over yet. Economist Gary Shill thinks the 1990s will be remembered as “the decade of the unemployed.”
Anyone who loses a job should be prepared to move, take a lower-level position, accept fewer employee benefits, take a pay cut, develop freelance work or marry rich.
Subpar growth is a call to ARMs. Adjustable-rate mortgages now average 5.4 percent for the first year and as little as 4.25 to 4.5 percent if you pay points up front (a point is 1 percent of the loan amount). By contrast, fixed-rate 30-year loans average 8.5 percent and 15-year loans, 8 percent. Home buyers tend to choose fixed-rate loans, so they can lock in the monthly payment. But ARMs in the 5 percent range look irresistible. They’ll rise to 7 percent in the second year, but that’s still cheaper than fixed-rate loans. If rates in general stay low, today’s ARMs will be a bargain.
Even if interest rates jump unexpectedly and you pay 9 percent in the third year, you’ll have saved so much money in the first two years that you can afford it. No matter what happens, most ARMs cannot ever rise more than 2 percentage points a year or 6 points above their starting rate.
Stockbrokers are hitting the phones to sell “Clinton portfolios”–companies involved in bridge and highway construction, waste management, biotechnology, HMOs, clean-air compliance, worker training and high tech. At the moment, however, that’s just hype. It’s hard to know when the dollars will flow, let alone how much money will be spent.
More to the point is the market’s current value and shape. Nearly a third of the stocks priced over $3 are under their 1987 crash lows, says Robert Farrell, chief market analyst for the brokerage firm Merrill Lynch. More than half are down 20 percent or more from their 1992 market highs. Pessimists worry that fear-of-Bill will kick interest rates to a higher level. If short-term rates rise to 4 percent from 3 percent currently, stocks would be hurt, says Michael Metz, senior vice president of Oppenheimer & Co. But he doesn’t expect it. Metz’s ‘93 outlook: flat, like 1992. Farrell sees a tough year of “step down, then rally,” followed by a new bull market in 1994 and ‘95.
What will it take to spring us out of these turtle times? First, the industrial world has to use up (or wipe out) the excess capacity it created in the 1980s, David Levy says-the surplus office buildings and banks, the extra airline seats, the auto plants that are building more cars than consumers want to buy. That will take years. But only then will business truly reinvest and set growth on a higher path.
Clinton’s daunting task is to hasten this painful restructuring, while giving people the faith they need to see it through. Your task is to adapt your finances to a low-interest, low-inflation, flat-earnings economy. Spend carefully, pay off debt, consider muni-bond funds, contribute monthly to stock funds, acquire skills and get real.
PLANNING FOR THE DEMOCRATS
Ignore the peddlers of the “Clinton portfolios,” which include environmental stocks. Look for bargain prices. The next bull market: 1994.
These are the salad days for adjustable-rate mortgages, which average just over 5 percent interest in the first year. Act now.
If you make more than $150,000 ($200,000 for couples), count on a tax increase. One solution: tax-exempt state and local bonds.
You can expect more layoffs next year. If you lose your job, prepare to move, take a pay cut or come up with freelance work. Or marry well.
