Comments: Richard J. DeKaser
Senior Vice President & Chief Economist, National City Corporation
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?
The ongoing recession will be of average duration (10-11 months), but shallower and less broadly based than usual. For example, the coincident index of economic indicators has dropped 2% (1990-91) to 6% (1973-75) during recent recessions, but I expect this one to be shallower (i.e., less than 2%) than the mildest thus far. As for breadth, the relative immunity of the housing sector from this downturn makes this one unusually uneven. Manufacturers have born more than their share of the contraction.
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?
I strongly disagree with the conventional assertion that the U.S. suffers from excess capacity. While that may be true in some aspects of telecommunications equipment manufacturing (totaling 1% of GDP), because of hastened, pre-Y2K spending, I do not believe it to be more generally the case. Rather, the downturn in CAPEX reflects collapsing profit margins and heightened risk aversion (especially since 9/11). I do believe we can start a modest recovery w/o CAPEX, but believe it will recover well by mid-2002, as this year's cost cutting yields better margins next year and a contained (not eliminated) terrorist threat reduces risk aversion. Oh yeah, cheap money helps too!
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?
Of course the rate cuts are working; they've just been up against some severe negative developments (inventory overhang, weak global economy, negative wealth effect, high energy prices (earlier). Still, you wouldn't be seeing zero APR car loans w/o such an accommodative Fed. As for headwinds, there's only one (potential) candidate on the horizon: household leverage. I know that higher degrees of equity extraction are part of the ongoing refi boom, which, in turn boosts leverage and diminishes the improved cash flow effects from purely refinancing the mortgage at lower rates. What I don't know is how pervasive an issue this is. How much debt is being taken on? Who's doing it? High net worth households with substantial financial assets and low risk of job loss, or, Joe Sixpack? Too many unanswered questions. Can't wait for the 2001 Survey of Consumer Finances to be published.
Copyright 2001, Bloomberg L.P.
