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 is going to be a short recession, one that may challenge NBER's recession call. This recession is different from other reasons in many aspects: (1) industrial sector had been in decline for an extended period before wholesale followed into downturn. Employment decline began long after the NBER's recession starting date, while income has not yet shown clear sign of falling and retail is still growing (excluding September) at this point; (2) this is downturn/recession without a concurrent oil shock; (3) in addition to the concerns of a normal inventory adjustment cycle, it also reflect the adjustment of expectation in the early stage of tech infusion.
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?
Rebound in capital spending is not a prerequisite for an overall recovery in the economy, as capital spending is driven by the expected change in output, in other words, capital spending lags output change. There are two parts of capital spending adjustment, one is related to trimming the excess in certain IT areas, the one is normal cyclical adjustment. There is no reason that the latter, which is far larger than the former, will not rebound once demand picks up. In fact, most companies are not slashing capital spending, they simply do not want to commit to expansion at this point. But things can change quickly when signs of recovery become more evident.
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?
Earlier signs were on the housing market. Recent signs are on the auto and large-ticket durable market. With Octobers surge in durabe goods sales, which were driven mainly by the easy monetary environment, the market is less doubtful that the Fed has an impact. With the increasing role of non-depository financial institutions in the economy, the Feds impact may not be as significant/immediate as before, but it would be a mistake to dismiss the Feds influence. The market may be impatient, but this may be driven by the internet culture. With instant information, the rate of market participation has increased tremendously, patience may be diluted as a result. The difficulties for the policymakers are in a clear understanding of the structural change in the economy that is the national rate of unemployment and NAIRU in the current structural setting. Has productivity been permanently lifted? These are important as long as the Fed takes inflation control and employment as goals.
Copyright 2001, Bloomberg L.P.
