Comments: David Lereah
Chief Economist, National Association of Realtors
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 recession will be short-lived and shallow. I am assuming the Congress and Bush Administration will agree on a stimulus package shortly. This recession is markedly different from previous recessions. Rising interest rates and inflation choked the previous expansions, resulting in a slumping housing sector which led to recession. Today's recession took place in a low interest rate/low inflation environment with a healthy housing sector. The recession was caused by a burst technology bubble, a dramatic loss of stock market wealth, a contraction in the manufacturing sector and the negative consequences of the Sept 11 terrorist attacks. This is why the recession will probably be short-lived and shallow‹the housing sector is relatively healthy (it comprises and influences about 20 percent of GDP) and the operating environment of low interest rates and inflation is relatively healthy.
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?
Capital spending is crucial to the economy's rebound. I believe that consumers need to show signs of renewing their demand for goods and services in a relatively healthy manner in order for companies to commit serious dollars to capital goods.This should take place by the second quarter of next year.
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?
Fed policy has been limited in its effectiveness because this recession was not caused by rising and high interest rates. Thus, lowering interest rates has limited effectiveness. I believe that a good portion of the Fed's accommodation will have a postive impact on economic activity very shortly. However, any further rate cuts is probably "pushing on a string." But it is important that the Fed maintain a low interest rate environment for the economy so that the housing sector can stay healthy and continue to provide the much needed support for the rest of the economy.
Copyright 2001, Bloomberg L.P.
