Comments: Joseph Liro
Senior Market Economist, Dresdner Kleinwort Wasserstein
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?
I expect a very, very mild recession, which will last one year with a trough during March, 2000. From peak to trough, I'm looking for only a 0.5% loss of economic output or roughly $50 billion in real terms. The recession is unique in the enduring strength of the consumer and housing sectors and by the collapse of business investment spending. The enduring strength of housing and consumption has made for an atypically mild recession with the decline led by investment spending. Since there will be little pent up consumer demand to satisfy in the early stage of recovery, we are looking for a massive shift in inventory investment to boost output in 2002. If businesses simply stop liquidating inventory in 2002, it should add about $80 billion to GDP. We also anticipate a strong rebound in capital goods spending in the second half of 2002 as corporate cash flow improves enough to rekindle the demand for productivity enhancing equipment and software.
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?
We anticipate a strong rebound in capital goods spending in the second half of 2002 as corporate cash flow improves enough to rekindle the demand for productivity enhancing equipment and software. It was the collapse in capital goods spending that led us into recession and while there remains concern about the overhang of unused capacity, given the rapid technological obsolescence, companies will feel the need to upgrade their capital stock.
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?
Once again, the Greenspan Fed has done an excellent job in its conduct of monetary policy. The Fed recognized the possibility that it over-tightened in 2000 as it began to ease policy in January, three month prior to the onset of recession. We think the Fed may ease several more times in small 25 basis point increments before it is assured the economy is on the mend. I take the behavior of the consumer and the housing sector as proof that monetary policy is working. Consumption has yet to turn negative in this recession and when it does, it will do so only for a brief time period. Housing remains vulnerable only because it has been so very strong for such an extended period. The main headwind the Fed faces is the investment overhang which was caused by the "irrational exuberance" of corporate management at the height of the internet bubble and less to do with the level of interest rates.
Copyright 2001, Bloomberg L.P.
