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U.S. Treasury Secretary Paul O'Neill couldn't restrain himself as he took the podium at a Feb. 1 symposium at the World Economic Forum in New York City. Three months ago, he noted, most economists ridiculed his contention in the wake of the September 11 terrorist attacks that it was too early to say the U.S. would be in recession in the fourth quarter. Sure enough, preliminary numbers show that the U.S. posted 0.2% growth in the quarter. "Once in a while, it's nice to say 'I told you so,'" O'Neill chortled. "And I told you so."
O'Neill's new message is that the worrymongers who predict that the U.S. will again slip into recession are also wrong. "I believe that if I had enough time, I could sway you, convince you, that the U.S. has the potential for 3% to 3.5% real growth for the indefinite future," he told the crowd at the Waldorf-Astoria Hotel.
BIG QUESTION. He should have hung around a little longer. After he left, the audience of business leaders, economists, and foreign finance officials broke up into more than a dozen small discussion groups to brainstorm over the direction of the global economy. Among the questions each group was asked: Would the U.S. enjoy a classic "V"-shaped recovery, meaning that the economic slump would be followed by an equally sharp rebound.
The resounding verdict: No. The most popular prediction was for a "W"-shaped recovery. And no, that doesn't stand for George W. Bush and his policy of enacting tax cuts to revive the economy. It is a recovery that looks like two "Vs" put together. This crowd believes that the economy, after spiking this year, will dive again before regaining its footing and returning to sustainable growth.
"We think we will get a trampoline bounce, and then the economy could weaken again," said Robert D. Hormats, Goldman Sachs International vice-chairman, who led the discussion at one table that voted for a W. "At the moment, it seems like the fourth quarter was a big win for monetary policy."
"JOBLESS RECOVERY." Robert J. Gordon, economics department chairman at Northwestern University and a leading expert on productivity, declared that "everyone has a great deal of faith" in the monetary policies of the Federal Reserve. "But this time, monetary policy won't be enough. The recovery will look much like the one in 1990-91, a jobless recovery." (Among the few voting for a V: Princeton University economist Alan Blinder and International Institute of Economics Director C. Fred Bergsten.)
The general view went like this: The recovery now isn't being fueled by tax cuts. Rather, it's being driven by the flood of liquidity pumped into the economy by the Fed, the depletion of excess inventories, the plunge in oil prices, and a burst of consumer spending that owes its strength to no-interest car loans and low import prices.
As the benefits of these factors burn off, the W theorists believe, the U.S. would again by weighed down by a long list of negatives. Among them: poor corporate profits, high consumer-debt loads, America's yawning balance-of-payments deficit, and a crisis in confidence in stocks after the Enron debacle.
PERVASIVE UNEASE. Josef Ackermann, a member of Deutsche Bank's board of managing directors, offered a different scenario: "A 'U'-shaped recovery -- with a gap." Think of a sharp decline followed by a period of flat growth, then a blank space factoring in the risk of another terrorist attack or some other event that would throw business into shock before an upswing occurs.
One might think that perhaps this dour outlook was somehow prodded along by the panel rapporteur -- New Economy cynic Paul Krugman, who regularly blasts Bush Administration policies in his weekly column in The New York Times. But pervasive unease over the direction of the U.S. economy was perhaps the overriding theme of this World Economic Forum. Citigroup Vice-Chairman Stanley Fischer, who saw plenty of financial crises during his tenure at the International Monetary Fund in the 1990s, told a panel of business leaders that he would "be surprised to see a rapid recovery from where we are now," considering the enormous financial and corporate excesses of the 1990s. "We're in for slow growth for several years," he said.
Stephen S. Roach, Morgan Stanley chief economist, also predicted that the U.S. is in for a double-dip recession. "We cannot count on the U.S. consumer to carry the U.S. and the global economy on his back any longer," he warned, calling the jump in fourth-quarter spending "the last gasp of the overly indulgent U.S. consumer."
Mind you, all of this pessimism was being put forth while outside the Waldorf, the media were reporting various signs that a U.S. recovery was firmly under way. Secretary O'Neill may well appear at next year's World Economic Forum to chortle another "I told you so." But he has a lot more selling to do if he's to convince the world's economic elite that now is the time to bet the bank on the imminent return of long-lasting American prosperity.
Engardio covered the World Economic Forum in New York for BusinessWeek Edited by Douglas Harbrecht
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Copyright 2002, Bloomberg L.P.
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