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?
Assuming no further significant terrorist actions, the economic recovery, which I expect will begin in 2002Q2, will be characterized by strong but not boom-like growth. Leading the way will be the the technology and travel industries, which will rebound strongly from their currently very depressed conditions by the second half of next year. The recovery will be constrained by more muted consumer spending growth, as there is no pent-up demand for autos and housing.
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?
I expect profits to stabilize in the second quarter of next year, and be growing at a double-digit year-over-year pace pace year's end 2002. Businesses are working hard to reign in their cost structures. Energy and material costs are declining, interest payments will soon begin to decline strongly, and given more moderate labor compensation growth and sturdy productivity growth, labor costs are set to rise susbtantially more slowly. I believe this is roughly consistent with current investor expectations.
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 will hold their own next year. Real disposable incomes will be supported by another round of assumed tax cuts (hopefully a payroll tax holiday), lower energy prices and disinflation for other goods. Consumers will also benefit from lower debt service payments resulting from the lower interest rates and much less aggressive consumer installment borrowing. Housing will neither add or detract substantially from growth next year. Relatively low mortgage rates and still aggressive mortgage lending will offset any fallout from the generally weak job market on housing demand.
Copyright 2001, Bloomberg L.P.
