Comments: Ian Shepherdson
Chief U.S. Economist, High Frequency Economics
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?
I'm assuming no further significant terrorist attacks and no major domestic effects from the war. The immediate spur to recovery seems to be the consumer: the wave of mortgage refis, the summer's tax cuts, the drop in energy prices, the recovery in stocks, and the lure of cheap car financing is a potent combination, at least in the near-term. Relatively strong wage growth is important too. Beyond the next couple of quarters, a sustainable recovery depends on the industrial sector, but good progress has been made there too. The inventory correction is well-advanced -- though less so in the tech sector -- and the lagged effect of lower interest rates was already boosting the NAPM well before 9/11. The export sector will be the last to begin recovering, however, because the European economy is lagging the U.S. by at least a couple of quarters. Japan is a disaster area, with no prospect of improvement. Couple this with a strong dollar and 02 will be a tough year for exporters.
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?
Outside the tech sector, I expect earnings to rebound very sharply next year, though a big percentage gain will be slightly misleading given the extremely low base that will be set in the current quarter. Whole economy profits after tax should rise at least 20% in the year to Q4 02; a bigger rise is not implausible. With a cyclical drop in unit labor costs, a strong dollar holding down imported materials prices and very soft energy costs, a decent rebound in revenues will translate into big gains in net income. Again, exporters will find the going much tougher.
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?
Consumers's net balance sheet position is extremely strong; the rise in gross assets in recent years has been many times bigger than the rise in gross debts, which in my view is a real red herring -- second only to the idea that rising unemployment will depress spending. If that were true, there'd never be a recovery. Real wages will rise next year -- headline inflation will not be much above 1%, and wages will rise by at least 3%. Then there are tax cuts and the lagged effect of mortgage refis to consider. Housing is a different story; it will remain very strong for the next few months thanks to the low mortgage rates after 9/11, but the markets are clearly keen to push rates up as the recovery emerges. I do not expect housing to contribute anything to growth in 02.
Copyright 2001, Bloomberg L.P.
