Comments: Michael R. Englund
Chief Market Economist, Standard & Poor's MMS
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?
This recession has been profit-led, and the inventory and investment contraction was largely complete before the shock to consumer confidence from the 9-11 terrorist attacks occurred. The period would not have been declared a recession had it not been for 9-11, given the strength outside the investment/inventory and general factory sector. With the 9/11 attacks, an additional hit was seen in spending, which tipped the scales that led to the NBER determination. Given that fiscal and monetary policy were both eased sharply in response to the early downturn in the factory sector, the recession is experiencing an unusual dosage of stimulus from policy. Because the negative spending impact from the terrorist attacks is proving smaller than expected, the combination should lead to a quick reversal in the economy. As such, the recession should be roughly average in duration but shallow and concentrated.
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?
Just as business investment overshot a sustainable pace through the 1998-2000 period, so these figures are undershooting a sustainable rate now. Businesses cannot indefinitely delay replacement expenditures, and inventory continue to unwind at an historic rate as production is falling well short of sales. When sales reach a floor, as may already be occurring, production will need to accelerate sharply to bring production back in line with sales. This upside jolt to the sector will be significant, and will dissipate the negative psychology in the technology sector.
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?
We should be patient. Residential investment has posted very unusual strength through this recession due, presumably to the early and aggressive Fed easing. Vehicle sales have been quite robust, with a zero-percent financing program that largely reflects the effects of low interest rates, as the "subsidy" component of this aggressive pricing is actually in line with prior promotion efforts. The catchy "zero percent" program is possible because of the low cost of financing the program. Monetary policymakers always experience a 6-18 month lag between policy changes and economic effects, so the impact is actually not particularly slow this far. To the extent it is, this may reflect widening "spreads" in the credit markets, but time will tell whether there is any unusual delay to explain.
Copyright 2001, Bloomberg L.P.
