Comments: Constantine G Soras
Economic Advisor, Biovest 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?
The traditional interest sensitive sectors of the economy, housing starts and auto will be once again the leading sectors leading the economy out of recession. The sharp drop of short-term rates to levels not seen since early in the 1960's will benefit consumer spending across the board as interest payments fall sharply.
Assuming no further surprises, the negative impact of terrorist activity will fade and consumer spending patterns will be restored.
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?
The combination of cost cutting and lower interest rates will put an end to the decline in profits for most industries. In the capital goods sector, however, the decline in capital spending is likely to continue through the first half of 2002 before turning around. As a result, profits in the capital goods sector, particularly telecom and information equipment will continue to come under pressure.
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?
New housing construction together with the auto industry have been key factors leading the economy out of recession. In this business cycle, however, new housing construction has remained quite strong and total motor vehicle sales were at record levels in the last three years. While a strong rebound in new housing construction and auto production at a sustained rate is not in the cards, notheless there is enough slack to propel the U.S. economy out of the recession. With short-term rates down to the lowest level in four decades, the interest payments on the heavy debts will ligthen freeing up funds for both spending and lowering bedt. As consumer uncertainty arising from the terrorists activity diminishes even if air-travel takes quite sometime before bouncing back to normal levels, consumers are likely to spend more money in areas within traveling distance. Thus, the initial negative impact on consumer spending will be short-lived. Furthermore, the decline in nonfarm employment will run its course by the end of the first quarter of 2002 and will strengthen consumer spending from then on.
Copyright 2001, Bloomberg L.P.
