Comments: Bill Cheney
Chief Economist, John Hancock Financial Services
How bad will the recession be in terms of its depth, breadth, and duration? Importantly, how does this downturn differ from those in the past, and how will those differences affect how this recession will play out?
Depth looks shallow (for GDP, total jobs): this includes a very severe cycle for manufacturing and a mild but broad downturn across most non-manufacturing sectors. It should last just about a year, which would be only slightly longer than average, but it may take quite a long time -- say almost another year -- to recover to pre-recession peak employment levels (like the last recession, which was itself unusual in this respect). It's different from most past cycles in terms of the long gradual slide down, the sustained strength of interest-sensitive consumer sectors (housing, autos) -- which therefore have little room to accelerate and jump-start the recovery -- and the low inflation rate going in. It will probably result in a slow recovery, especially since the Fed will probably perceive a need to tighten unusually soon to offset the unusually large infusions of liquidity from the past year in the context of a still fairly low unemployment rate. The pace and timing of the recovery still depend crucially on the amount and timing of any fiscal stimulus; political opportunism has already delayed the stimulus package unreasonably long, and much additional deadlock risks pushing it out to next summer when it may actually be counter-productive (causing the Fed to tighten exactly hard enough to offset the impact).
Capital spending has borne the brunt of this slowdown/recession. Can the economy mount any meaningful recovery without a significant pick up in capital spending? What are the influences underlying your outlook for business investment next year?
Capital spending is not an absolute requirement for a recovery (C+G represent most of GDP), but its hard to see how a revival in demand wouldnt stimulate a lot of business investment, if only for repairs and replacements. The whole story about excess capacity is way overblown, and really relates only to a few of the technology-producing sectors. For most businesses thats a good thing, since it means cheaper capital goods, which they will snap up as soon as cash flow from sales permits. A lot of investment projects are just on hold, waiting for better times to be re-started.
The Fed has lopped off 450 basis points in 11 months. What are the signs that easier policy is working its way through to the real economy? Is there some structural blockage, or should we just be patient? What kind of headwinds are policymakers up against?
Easier policy has already worked, visible in the sustained strength of the housing sector. Its way too early to declare monetary policy ineffective (which of course hasnt stopped commentators from doing so in every cycle that I can remember). Theres about a years lag normally: easing in 2001 should produce growth in 2002. Thats life. I dont believe the headwinds are materially worse than in any other cycle, and policy has been simpler than usual to decide given the absence of inflation.
Copyright 2001, Bloomberg L.P.
