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?
Less than post-war average depth, breadth, and duration. Biggest difference between this recession and past episodes is the larger role played this time around by profit-squeezed investment and by the global slowdown shutting down exports. More typically those two factors play second fiddle to consumption.
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?
The profit squeeze got us in. Unwinding it will get us out. In the new economy, companies complain about the lack of pricing power. So this will entail some steady recovery in productivity and/or some moderation in the rise in labor costs. The revised data on productivity and ULC for the third quarter suggest the process is underway, though unlikely to be finished before spring at the earliest
It helps that borrowing costs are so low, thanks Chairman Alan. But falling prices for high-tech while labor costs remaining expensive make the cost of capital cheap relative to the cost of labor. Finally, the need to invest to generate productivity gains provides the motive. So much for overivestment leading to excess capacity, limiting the investment rebound
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?
It worked with respect to vehicle sales in November. There are two larger points. 1) Without Fed action, we probably would have had a steeper and longer recession -- so it's not clear that the Fed hasn't reaped any returns. 2) The cuts were never JUST about the domestic economy. A) to be sure, the Fed tried hard to minimize the slide from 5% GDP growth to 1% declines. B) It was also trying to minimize the slide from 4% global GDP growth to 1.5%. Like Keynes taught us decades, that's too big a job to handle with interest-rate policy alone.
Copyright 2001, Bloomberg L.P.
