Comments: Michael Moran
Chief Economist, Daiwa Securities America
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?
Moderate downturn will give way to a moderate expansion. Invneotry investment will lead the turn in the first quarter, while final demand will become more of a factor during the second quarter. Business ficed investment will continue to decline in early 2002, but the rate of decline should slow noticeably. Growth in business spending is expected in Q3, spurred, in part, by incentives to be included in the upcoming fiscal package (yes, we will have more fiscal stimulus). We will not see much of a contribution from households. The housing market is lacking pent up demand, and individuals need to contain spending to boost saving rates.
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?
Profits should strengthen. An increase in the volume of business (i.e. faster GDP growth) naturally will work to boost profits, and margins should increase as well. Wage growth will be noderate because of higher unemployment and productivity should be strong because of its normal cyclical burst. I'm looking for Q4/Q4 growth of approximately 10 percent.
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?
The role of heavy debt is exaggerated. Some households are stretched, and ratios of debt to income look troublesome, but in the aggregate, the situstion is not alarming. While debts have grown quickly, so too have assets. Debt is not far out of line with assets. The net worth of the household sector is high, even after the correction in the stock market. The distribution of debt and assets may be skewed some (those with the debt may not have assets), but the situation is less than alarming.
Having said that, I believe the saving rate is unsustainably low. Movement back to a higher saving rate will limit the growth of consumer spending during the early portion of the next expansion.
Housing will be only a small positive factor because pent up demand will be nonexistant.
The lack of vigorous support from the household sector is an important reason why the economy is not likely to have a burst of above-trend growth in the early portion of the recovery.
Copyright 2001, Bloomberg L.P.
