Comments: Ken Mayland
President, ClearView Economics, LLC
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?
Consumers, as usual, will lead the way: in terms of growth, durables; in terms of dollar volume, services. Housing will have a muted recovery, only because it performed so well during the so-called recession. Perhaps the surprise: the GDP business investment account "information processing equipment and software" (= high tech stuff) will bounce back strongly. Why, with so much unused capacity? Because much of this investment is cost-saving, as opposed to capacity-augmenting. The swing from a severe inventory correction, to a very modest degree of inventory restocking, will add _% to the economy's 2002 growth. And not out of the chute, but as the year unfolds, export activity will enjoy a strong upsurge. Hence, most of the stars have aligned for a normal (=strong!) bounce back. In contrast, however, the recession for business investment in structures will last for most, if not all of 2002.
The arm-chair economists need to avoid 3 recovery fallacies:
1. That income growth needs to accelerate in order to achieve consumer spending growth. (In fact, consumer spending growth leads.)
2. Accounting for the economy's growth starts at 0%. (In fact, the analysis should commence from the economy's growth potential‹its normal or equilibrium state‹say 3.25%.)
3. Monetary policy is no longer effective at influencing the economy ("what is there to show for 10 cuts to date?"), OR low interest rates do not matter when the economy is soft and companies are not interested in investing. (In fact, people typically come to this conclusion BEFORE the long policy lag‹one full year!‹has run.)
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 profits rebound, in percentage terms, will be surprisingly strong in 2002, for three reasons. First, the Osama recession has provided companies a "free pass" to load the boat with every possible charge to earnings through year-end 2001. This has lowered the base for 2002 comparisons. Second, in general, there is a lot of leverage between profit growth and economic growth (at least 3 to 1), and this was enhanced in 2001 as companies "skinnied down." Third, the huge amount of liquidity that the Fed has heaped upon this economy could allow by late 2002 a little more "pricing power" on the part of companies. Growth AND price increases: WOW!
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?
I do not accept the premise of this question. Consumer balance sheets are in very good condition. Stock market wealth‹at a market trough‹is down $4 trillion from peak values, but at the same time, it is UP $5 trillion from early 1995. I don't think consumers ever banked upon early 2000 equity market wealth as being "permanent." And now, equity wealth is again rising. There are just too many caveats associated with the "saving rate" to discuss here. One should not automatically conclude, however, that a 0% personal saving rate is "bad." (What is the lesson of Japan vs. the U.S. re saving rates?) The saving rate IS a leading indicator. I predict that the saving rate will fall in 2002, perhaps sharply, and that this will be GOOD! It is a fact, and my presumption, the consumers ARE key to a satisfying recovery. (Housing addressed in Q1.)
Copyright 2001, Bloomberg L.P.
