Comments: Christopher Low
Chief Economist, First Tennessee Capital Markets
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 should be brisk thanks to expansive monetary and fiscal policy and a solid consumer sector. All three of these were a drag on activity in the early 90s -- one reason the last expansion began so slowly -- all three are positive factors now. That significantly raises the risk of a V-shaped surprise.
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?
The worst of the profits news is behind us. This recession is unique in the Postwar era in that corporate belt tightening was well underway months before the recession began. Spending for equipment peaked in August 2001, and inventory cutting began in earnest in the first quarter of 2001. It may be a year or more before double-digit profits growth resumes, but earnings should be growing again early next year. The stock market is already on he right track, but the rally has years to run.
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?
Mortgage refinancing may be the key. Refis were an inconsequential factor in every prior recession, but consumers have become adept at using the refi process to reliquify. The recent level of refinancing activity was well in excess of prior records and will add billions to consumer spending power by the start of next year. Forget the tax cut, it wa a pittance in comparison to this.
Copyright 2001, Bloomberg L.P.
