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?
No way to factor in the timing or severity of another attack. All forecasts are "barring another attack". Have factored in more fiscal stimulus and less productivity than before 9/11. Expect second half "headline" GDP numbers to "look" better than the economy "feels" -- because the mathematical impact of going from big negative to modesti positive in capital spending and inventories won't be matched in hiring and consumer spending (housing and motor vehilces will lag in this recovery since they didn't "suffer" all that much)
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?
Based on the 3Q data in Friday's GDP revision, the yr/yr decline in adjusted operating profits , down 22% yr/yr. Even without the 9/11 insurance related losses, the decline was 20%. This has been one of the wosrt profit recessions ever. Our forecast has a further 15% yr/yr decline in the 4Q, and 5% decline in 1Q, before a 5% yr/yr increase in 2Q. The increase is as much a reflection of very weak comparisons as it is of solid profit recovery. Our view would seem to broadly square with First Call, but we think the consumer implications are different than the market seems to be expecting. (See below)
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?
Following up on the prior question, we would add "rising unemployment" and "less income growth" to the list of factors that will constrain consumers next year. In fact, the lack of "pent up demand" in housing and motor vehicles combined with the high debt load and loss of jobs makes us believe the "recovery" will be just as enigmatic as the "recession" has been. The turn from negative to very modest positive in inventories and capital spending will have a strong mathematical impact on GDP calculations in 2002, but the economy will not "feel" strong due to the inability of housing and motor vehicles to increase strongly (with little downturn, how can they rebound strongly). The stock market and profits may well do better, but in a mirror image of the situation in the fall of 2000 (when stocks and profits were tanking while households maintained a feeling of prosperity), the 2002 situation is likely to be marked by disappointment at the household level.
Copyright 2001, Bloomberg L.P.
