Comments: Nicholas S Perna
Perna Associates,
Ridgefield CT
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 fairly decent overall. During the first year (2002Q1-2003Q1) I expect real GDP to rise 3.6%. This falls shy of the average rise of almost 5% in the first year of recovery of the past 5 recessions, but is considerably better than than 2.2% during the 1991-92 "jobless recovery." My main reasons for this are (1) the huge amount of monetary and fiscal stimulation already in the pipeline and (2) the usual cyclical forces such as the need to rebuild imventories following the sharp de-stocking that has been going oin in recent quarters. In short, we are likely to be surprised by the vigor of the rebound. I don't agree with those who say this recovery will be anemic if what they mean is a re-play of 1991-92. This bodes well for profits but it also means further upward pressure on interest rates -- including the need for the Fed to tighten later in 2003. A Fed funds rate at ot below 2% is too low for an economy growing at a 3 _% rate with 2 _% inflation.
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 start rebounding a quarter or two before the economy turns around. One reason for this is the end of the extraordinary drag on profits associated with the immediate aftermath of September 11 -- such as insurance claims. Also, firms will use the current environment to stuff all the bad news they possibly can into the final quarter of 2001 --- setting the stage for a profits rebound early next year. These factors -- plus the rebound in GDP -- mean that profits (GDP-style) will rise at least 15% from 2001 Q4 to 2002 Q4 --- and the odds are that the increase will be considerably larger.
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?
): By next year, labor markets should be improving so that rising jobs and improving consumer confidence should help spark consumer spending by the second half of 2002. Housing will be a drag during the first half of the year as the recession takes its toll on housing starts, but improving jobs, incomes and concumer wealth should pull housing into positive territory during the second half.
Copyright 2001, Bloomberg L.P.
