Comments: Stephen Gallagher
Chief US Economist, Societe Generale
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 length of this recession was prolonged by an early start date of March 2001.
Regarding contraction of the economy it has less depth but relative to the Potential performance of the economy the recession has average depth.
The breadth of the recession was very narrow. Consumer demand and real estate were stable. This recession was a Tech bust and a corporate profit recession. This will also define the recovery. Consumer and housing gains will be more limited given their higher starting base for a recovery. Technology will have large gains in the upcoming cycle due to a low starting base.
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 first gains will come from the consumer sector which will reduce inventories to a point that triggers production gains. Capital equipment expenditures will follow. Momentum for capex expenditures will growth through the second half. Short life cycles and a need to catch-up after a year of limiting investment expenditures will allow for solid investment gains. We may see short spurts of very strong growth in this area, but we are unlikely to return to pace of late 1990s.
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 are currently seeing the fruits of low interest rates. Homeowners have refinanced and money is piling up in the financial institutions. The benefits of low rates may have worked earlier to restore stronger growth, but the terrorist attack extended the slump. Aside from this event, the response to low rates needed time to play out. Before consumer and businesses could take advantage of cheaper financing rates, layoffs and cutbacks on investment were needed. These are normal cycle events. What may have been working against the Fed throughout the entire slump was the strong dollar and the weak global economies. Low US rates and weak economic conditions would normally weaken the US dollar and provide trade advantages. Throughout the current slump, the US has held a stronger potential position that has strengthened the dollar, which limited access to foreign markets.
Copyright 2001, Bloomberg L.P.
