Comments: John Pope
Economic Advisor, Investment Economics
How bad will the recession be in terms of its depth, breadth, and duration? Importantly, how does this downturn differ from those in the past, and how will those differences affect how this recession will play out?
This is not your "normal" recession. Previous recessions were generally accompanied by rising prices and the Fed's attempts to offset them by increasing interest rates. The onset of this recession, however, had more to do with dashed expectations in the capital markets. Accordingly, there is much unchartedritory, which means that the recession could get more severe, in large part due to uncertainty.
Capital spending has borne the brunt of this slowdown/recession. Can the economy mount any meaningful recovery without a significant pick up in capital spending? What are the influences underlying your outlook for business investment next year?
It seems improbable that a recovery will occur in the next year without a bounce in capital spending. However, given the economy's excess capacity after almost a decade of decent capital spending, there may be cost savings going forward that permit expansion by spending in other areas. Of course, capital spending is expected to increase significantly in defense related industries due to the war against terrorism and this administration's favorable attitude towards the military.
The Fed has lopped off 450 basis points in 11 months. What are the signs that easier policy is working its way through to the real economy? Is there some structural blockage, or should we just be patient? What kind of headwinds are policymakers up against?
Yes, the Fed has been aggressively easing to sure up capital markets and confidence in general. But easing amid a lack of response can be like flooding an engine that won't spark. If the economy doesn't pick up while rates go even lower, the Fed could get cornered between a growing fear of "only an upside to rates" and the need of an ever-stronger economy for the Fed to push rates back up to flexible levels without impeding the economy. At this point, everyone should stop expecting solutions from the Fed. The Fed is not really Santa Claus.
Copyright 2001, Bloomberg L.P.
