I.D.E.A. Global Focus Nov 19 1998 11:05AM CSTArchives...
US Focus -- The crash of 1999 Corporate profits are falling and industrial production is slowing, even as the housing and stock markets continue to rise. 1998 looks a lot like 1987 -- and they're both likely to end in the same way, with a stock-market crash.
Thursday saw news that the number of houses being constructed grew again in October. Over the course of 1998, the figure's grown more than 10%.
But construction activity is failing to jump-start the rest of the economy. Normally, an increase in construction shows up in industrial production figures a few months later. All the new houses need to be kitted out with manufactured goods. But now, production is heading into a tailspin. Industrial-production growth has fallen to a year-on-year rate of 1.4%, from 5.8% at the end of 1997.
The situation is atypical, but not wholly unfamiliar. In the mid-1980s housing was very strong even as the broader economy was slowing.
'The current macro-economic picture is very similar to the mid-80s,' says Harvinder Kalirai, chief US economist at IDEA.
Then as now, the dollar was very strong, driving the trade deficit wider. Cheap imports are beating domestic producers on price, and US exporters are unable to compete abroad. Corporate profits are falling.
'The similarity between the mid-80s and now is a little scary,' says Kalirai. However, the US economy isn't in as grave a situation as it was in the middle of the last decade. In the mid-1980s corporate profits were falling at a double-digit pace, while now they are falling at only about a 5% yearly pace.
And in the 1980s, the Federal Reserve was in a tightening cycle. Now, the Fed has cut interest rates three-quarters of a point in seven weeks.
Nevertheless, a stock-market crash awaits. In 1987, there was a one-day 22.6% fall. In 1999, it might not be quite as short or quite as sharp, but it will still be painful. Look for disappointing fourth-quarter earnings, released in January, to precipitate the decline.
InterMoney sees the Dow falling roughly 18% to 7,400 in the first quarter, from around 9,000 at year-end. The drop will probably take a week or so. |
