Comments: David Resler
Chief Economist,
Nomura Securities International, Inc.
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?
Following an unprecedented depletion of inventories in the second half of 2001, businesses begin to ramp up production to better match demand, which still grows anemically through the 1st quarter. The "bounce" in GDP in Q1 is not very indicative of the economy's vibrancy as it comes entirely from the swing in inventory investment (less negative) and government purchases, esp.. defense-related.. "private sector" final sales are projected to decline for the 4th straight quarter in Q1 but begin to edge higher in Q2, eventually recovering the Q1 2001 cycle trough by Q3 2002. Our forecast makes no explicit assumptions any further terrorist attacks but it does incorporated higher defense spending that has already been approved by Congress. One cannot usefully factor in the Śrisks" of terrorist action -- it is a binary outcome -- either there are more attacks or there are not. To assume that there are would then necessitate making further assumptions about their nature. I don't know how to do that.
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 continue to be eroded by weak demand. We foresee further declines in before tax corporate profits (NIPA concept) in Q4 and Q1 before a smart rebound. It will be difficult however to generate much momentum to profits with aggregate demand relatively soft
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?
With the strength of vehicle sales in October and again in November neutralizing much of the post-9/11 jolt to total PCE, consumer spending is likely to increase in Q4 and creep slightly higher in Q1 as a recovery in non-auto demand offsets the "payback" of Q4 strength in autos. As a result, our forecast includes no quarter with a drop in PCE -- the first time that consumer spending has continued to expand thru a recession. Still, the "rebound" in PCE is modest with growth in 2002 and 2003 projected at just 2.1% and 2.5% respectively. We see housing as RELATIVELY strong but with some declines in res. Inv.
Copyright 2001, Bloomberg L.P.
