Barron's :The Good News Is That the Bad News Is Wrong
Economic Beat, January 15, 2001
The Good News Is That the Bad News Is Wrong
By GENE EPSTEIN
When Ted Gibson, the chief economist for the California Finance
Department, heard that Morgan Stanley's chief economist, Stephen S. Roach,
effectively declared the Golden State in recession last week, he scoffed in
disbelief. "Somebody ought to inform Roach," Gibson told me over the
phone Thursday, "that if California's economy is contracting, you wouldn't
know it from the surge in withholding-tax receipts."
Through the six weeks ending Friday, January 5, explains Gibson, the
withholding figures were running 16% higher than a year ago, a sure sign
that the expansion remains firmly in place. The last time a recession struck,
back in July 1990, this economist was one of the first to know it was on the
way: Through the first six months of that year, California's withholding-tax
receipts were in free fall.
According to Morgan Stanley's Roach, the U.S. economy is witnessing a
"broad-based contraction in domestic final demand," as well. But you
wouldn't know it from the recent rebound in retail sales, as reported by
those two respected sources, Bank of Tokyo/Mitsubishi and Redbook
Research.
For the week ended Saturday, January 6, the former's index for same-store
sales was up 5.7% compared with a year ago, while Redbook Research's
was up 6.7%. Bank of Tokyo/Mitsubishi senior economist Michael Niemira
believes the strength in sales conveys a "message for the big picture" --
namely, that the poor performance of November and December was
weather-related, and "should not be extrapolated" into January.
"Retailers told us that as the weather got better in the first week, so did
sales," says Niemira.
The National Weather Service reported that November and December
witnessed the coldest temperatures since it began keeping records in the late
1800s. Since this extraordinary cold snap came on the heels of four
successive warm holiday seasons (from 1996 to '99), there's no way to
usefully compare what recently occurred to the patterns of the past.
Friday, the Census Bureau reported that December retail sales rose a mere
0.1% on a seasonally-adjusted basis, but those seasonals have been
suffused with global warming, a state of grace that renders them all but
useless. Moveover, this 0.1% estimate is based on figures for the early part
of December -- and that's when the worst of the winter storms kept shoppers
away from the stores. (As I've pointed out, the Monday Christmas and late
Chanukah delayed holiday shopping.) Since the final two weeks of the
month showed a rebound in sales, the Census estimate should be upwardly
revised in next month's report.
But what if the rest of the winter proves to be as harsh as the past two
months have been? Well, then, the consumer might hibernate 'til spring. But
if the recent thaw persists, then the boom conditions that have prevailed
since early '96 should resume in the first quarter of 2001.
Roach thinks the economy has skidded into recession because of an
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unwinding in the "IT [information technology] cycle."
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But contrary to what he suggests, there's no indication at all that (in his
words) "U.S. IT demand [is] heading to zero." In the first two months of the
fourth quarter, new orders for computers, communications equipment and
electronic components were up 12.4% from a year ago, even as the
dot.coms and telecoms were going bust.
The real problem with all this hightech disaster talk, however, is
conceptual: The idea that the current business cycle is somehow an IT
cycle, or that high tech has somehow been the "engine" of U.S. economic
growth, is to confuse metaphor with fact.
The fact is, high-tech-related goods and services still constitute a small
percentage of what we buy, and if we decide to buy less of them, we'll
simply purchase more of something else. On the other hand, since high- tech
is so ubiquitous in what we buy, its growth is virtually assured so long as
the economy continues to grow.
And if there has been an engine that has powered this consumer-led
boom,
it's been the surge in wages and salaries,
fruit of the tightest labor market in 30 years.
Steven Roach remains one of the bright lights of Wall Street, but I can't
resist twitting him with the late John Liscio's classic put-down (a quip that
Roach himself is personally fond of): Facts check into the Roach motel,
but don't check out.
If there's one refrain dear to the hearts of IT-doomsayers, it's this: Look at
how much high-tech has contributed to economic growth, they ominously
inform us. Therefore, it must follow, as night follows day, that if IT
investment begins to slow -- or worse, begins to shrink -- then that boost
will be gone or will even go negative and GDP growth will suffer mightily
as a result.
After all, they add, putting on the green eyeshades, the Bureau of Economic
Analysis finds that computers, software and telecommunications together
accounted for 22.9% of average GDP growth from 1995-99. And with
somewhat dubious economic reasoning, a recent Commerce Department
report goes even higher than that, putting the combined contribution at
one-third. Either way, however, we're talking major donors we can't afford
to lose. (Economist Roach also pushes this point.)
But here's the flaw in that twisted line of thought: As Roach himself
readily notes, the current and pending cutbacks in high-tech investment
consist of bubble-related fluff-excess, even waste-stuff that made a
negligible contribution to GDP growth to begin with. The core of IT will
remain, and the core is the real source of growth.
In that regard, I recommend a stirring article by Jonathan Rauch in the
January issue of the Atlantic Monthly, called "The New Old Economy: Oil,
Computers, and the Reinvention of the Earth." Rauch describes how the
use of "high-resolution 3-D seismic imaging," made possible by high-speed
computers, has slashed the cost of finding new oil.
That kind of investment is likely to persist. But the demise of pets.com
or the hoped-for death of drkoop.com might end up boosting growth by
freeing up resources for more productive uses.
Putting on the green eyeshade again, the National Income Accounts show
that investment in "information processing equipment and software" ran at
an annualized $548.6 billion in third quarter 2000, or $103.1 billion higher
than the year before. Now, at the extreme, let's assume, in line with Roach's
zero-growth prediction, that in 2001, we're still running $548.6 billion, and
that this $103.1 billion "contribution" melts away completely.
Result: A mere 1% of a $10 trillion GDP would be in play, with a big
chunk of it probably going to the planned buildup of U.S. military hardware,
but hopefully toward other purposes as well. That would be bad news for
some, and good news for others. But on balance, hardly the end of the
world, or even the end of the economic boom.
To be sure, if we were dealing with massive layoffs of middle-aged
workers who might have a hard time getting other jobs, then the secondary
shock of these bursting bubbles might be severe. But as I've documented
before ("High-Tech Work Levels Defy Slowdown," December 111), you
have to scratch hard to find any evidence at all that IT-producing people are
on the unemployment rolls. The demand for their skills is probably so great
that most of those who did get idled were snapped up very quickly.
And perhaps the rest, to steal a phrase from Merrill Lynch Chief High
Yield Strategist Martin S. Fridson, decided to finish up in business school.
Here's the final bit of news that nearly clinches the change that '01 will
be another very good year:
To begin with, the Mortgage Bankers Association index of mortgage
applications jumped 33.9% in the week ended January 4, thereby
reversing much of the aberrant decline of the prior few weeks, and
indicating that the strong trend in home-buying will persist.
But also, the MBA Refinance Index more than doubled. And with
mortgage interest rates falling below 7% for the first time since April '99,
another wave of mortgage refinancing is surely under way, putting fresh
cash in the hands of consumers that will help fuel this consumer-led
boom.
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( My take on Ted Gibson @ Morgan Stanley: Morgan
wants to raise fears of reccession in California
because they want The Fed and The USA taxpayer
to do something to bail out California.
Reason is that they are bif financers of
California Utilities, PG&G
and they are worried about getting their money back
TA |
