Comments: Daniel Laufenberg
Chief U.S. Economist, American Express Financial Advisors
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?
Obviously from above, I expect the recession to be relatively short and very mild compared with past downturns. As a result, the recovery will be much less robust in its first year than is typically the case; that is, it will be another "slow-motion" recovery, similar to the recovery following the 1990-91 recession.
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?
In the first half of next year, any improvement in business investment will be led by the change in inventories. For example, if the change in business inventories goes from a decline of $60 billion at an annual rate in the fourth quarter of this year to a gain of $40 billion in the fourth quarter of next year, it will add about 1.0 percentage point to real GDP growth over the four quarters of 2002. To the extent that most of this inventory accumulation occurs in the first half of 2002, then it would add roughly 2.0 percentage points to the annualized rate of real GDP growth over the same period. In the second half of next year, capital spending kicks in again, but it probably doesn't return to its double digit pace of the 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?
Monetary policy operates through several different channels, not all of which seem to be available at the moment. The channels that have had a positive impact on the real economy are depository institutions and more recently the stock market. First, the more interest sensitive components of consumer spending probably have been much stronger than they would have been without the aggressive Fed easing so far this year. I'm referring to housing and motor-vehicle sales. After all, 0% financing would not have been offered by auto makers if the Fed hadn't lowered short-term rates as much as they did. Second, although the stock market is down so far this year, it is well above its September low regardless of the index considered. On the other hand, not all channels seem to be working exactly as hoped. First, business spending decisions still are dominated by cash flow and profitability, so lower interest rates have helped corporations improve their balance sheets but they really haven't increased capital spending‹at least, not yet. Second, most would expect the foreign exchange value of the US dollar to tumble in the wake of the Fed easing and the official recession in the US. The problem is that the rest of the world is in bad shape too. As a result, the contribution to real GDP growth coming from the trade sector has been very limited indeed. In 2002, the interest rate effect on housing and durable goods spending may fade a bit, but the stock market effect is just getting started again. Also, improved business profitability and a more stable world may help boost capital spending and exports, respectively, which are expected to contribute considerably to US economic growth next year.
Copyright 2001, Bloomberg L.P.
