Comments: Joshua Shapiro
Chief US Economist, Maria Fiorini Ramirez, Inc.
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?
We anticipate a mild recession in terms of depth of real GDP decline, but for the slump to last longer than the 11 month postWWII average. This has been a most unusual downturn in that it spread from the corporate sector outward to the consumer sector, abetted greatly by the popping of the tech bubble and also by weakening activity abroad. The corporate sector was put under intense pressure owing to a lack of pricing power (global overcapacity), copious debt and over-investment. When tighter monetary policy finally caused a slowdown in demand growth, the profit squeeze began in earnest, propelled further by accelerating unit labor costs as the cyclical element of productivity growth evaporated.
We believe that the balance sheet element of this recession (too much personal and corporate debt) will contribute to it lasting until about mid-2002 and to the initial stages of the recovery being lackluster.
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?
A pre-condition for significant recovery will be for capital spending to at least stop declining (particularly as the usual engines of recovery -- housing and autos-- have not collapsed as they usually do in recession). We don't look for capital spending to bottom out until late next year, which is an important reason for our forecast of a sub-par recovery in its early stages. We think that ongoing clean-up of corporate balance sheets will hinder capex growth, as will a low capacity utilization rate, the tech overhang and a continuing need to control costs.
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?
Easier policy has helped keep housing strong, so it already has had a positive impact. There are substantial headwinds working against policy stimulus, however. These include too much consumer and corporate debt, ongoing labor market weakness as business continues to cut costs, a negative wealth effect, and a low saving rate. The immediate result is likely to be a stalemate (stagnant GDP growth), and further out these headwinds will result in a sub-par recovery in spite of the size of the monetary and fiscal stimulus.
Copyright 2001, Bloomberg L.P.
