Comments: Peter Hooper
Chief Economist, Deutsche Banc Alex. Brown
How do you expect the coming recovery to shape up, especially in terms of its strength and the sectors that will lead and lag behind? How have you factored in the uncertainties surrounding terrorist activity and the war?
The recovery will be led by a positive swing in business inventories, fiscal expansion, eventually rising business fixed investments. Consumer spending will contribute postively, but less than it normally does in recovery. Uncertainties surrounding terrorism and the war weigh on private spending near term but help boost fiscal expansion significantly.
The profits outlook is a crucial element in the recovery. What is your outlook for profits, and what factors will shape the profits recovery? Do your profit expectations square with those of investors?
Profits will rebound as the year progresses as productivity growth rises and unit labor costs slow. But the rise in profits will be much less than currently built into investor expectations imbedded in the stock market (IBES earnings)
Consumers will likely play a major role in the strength of the recovery. In the face of low savings, heavy debts, and sharply reduced wealth, how much can we expect households to contribute economic growth next year? And can we expect any contribution from housing?
Consumer spending will contribute a good deal less than it normally does as the low saving rate is rebuilt. Consumer spending (2/3 of GDP) will contribute little more than 1/3 of GDP growth. Business spending (especially inventory saving) and especially government spending will contribute more than normally do. Housing will make only a modest positive contribution.
Copyright 2001, Bloomberg L.P.
