Comments: Michael P. Niemira
Vice President & Senior Economist, Bank of Tokyo-Mitsubishi, Ltd.
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?
Given the fact that the recession was mild, the rebound is likely to be mild as well (which, of course, is a view supported by work done over the years by the late Geoffrey Moore). The catalyst for the recovery, in this forecast, is the end of inventory cutting and an upturn in corporate profitability. The improvement in profits will be slow at first, but with time (about six months) they will help to turn around fixed investment, which will further support economic growth by the second half of 2002. The cyclical sectors of the economy will not have the same lift as would be expected for comparison with past recoveries -- much of that lift in housing and vehicle demand is already at hand due to the lower interest rates. However, the main lift for 2002 is likely to be in manufacturing. Going forward, there is no explicit assumption about lingering uncertainty due to terrorist activity.
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?
After a five-quarter (assumed) contraction in aftertax corporate profits (see table), the manufacturing recovery, in particular, is likely to have the largest lift to the profit cycle. To some extent, I do think that investors are expecting that profit recovery and more of that is being built into stock prices.
2000:4
2001:1
2001:2
2001:3
2001:4
2002:1
2002:2
2002:3
2002:4
Corporate Profits ($bn) 563.0
518.9
510.3
495.0
474.7
481.0
490.6
498.8
505.3
% change -3.5 -7.8
-1.7
-3.0
-4.1
1.3
2.0 1.7
1.3
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 believe that the historical record shows that the consumer is more passive and will spend if they gave access to credit. Moreover, the Katona effect suggests reason to expect a pickup in consumer spending (see chart).
Copyright 2001, Bloomberg L.P.
