BIG PICTURE: The Case For A Prolonged Economic Slowdown
Don't worry about this though. Anyone that didn't know this must be brain dead and it is already reflected in share prices <gg>
08/07/2001
Dow Jones News Services
(Copyright © 2001 Dow Jones & Company, Inc.)
By John McAuley
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Those who have long looked for an economic revival in the second half of the year have had some faint signs of encouragement, but other indications remain disappointing.
The impressions have been mixed enough - not to say, downright confusing - that even the economists who spend most of their time sorting through the signals have split into two camps.
The "half empty" contingent notes disappointing levels of activity that have failed to show conclusive signs of self-sustained recovery.
On the other side of the fence sit economists who detect signs of building momentum and, so, believe recent data show a "half full" set of economic indicators.
The first of these two views will be examined here, the more positive outlook will be analyzed in a second article Wednesday.
It's Half Empty - At Best
A manufacturing sector in recession, a prolonged inventory correction, weak corporate profits and the potential for a steady rise in unemployment are the overriding factors for the pessimists.
"I think (the glass) is still three-quarters empty," said John Ryding, senior economist at Bear Stearns.
Citing recent economic data, Ryding noted that the National Association of Purchasing Managers' (manufacturing) index and the employment data for July, "had strands of strength, but it still seems to me that the numbers are pretty weak."
The NAPM index declined to 43.6 in July from 44.7 in June, which was officially characterized as "contracting at a faster pace" by the NAPM itself. The components for production, employment, and backlogs were classified as "contracting at a slower pace," but still contracting.
Ryding acknowledged less negative employment data, but the headline payroll numbers still showed a decline - down 42,000 instead of the 93,000 decline in June.
He finds no real signs of firming yet in the third quarter, which he expects will prove weaker than the 0.7% annual rate of growth now chalked up for the second quarter.
Ryding looks for an annualized 0.3% rate of decline this quarter, some pickup to 2.5% boosted by the tax rebate in the fourth quarter, but then a fresh slowdown to only a 2.0% rate in the first half of next year.
Signs Of Further Slowing
David Greenlaw, senior economist at Morgan Stanley, describes himself as "a bit more pessimistic than the consensus," citing some signs of further slowing as a result of weakness in capital spending.
The Morgan Stanley forecast calls for a 0.6% decline in the current quarter and the bank shaved off its estimate for the fourth quarter (now up at a 1.7% annual rate instead of 2.6%).
"Corporate profits determine capital spending and the corporate profit outlook remains poor," he said.
Greenlaw expects a decline in capital goods spending going into the third quarter and believes there is a risk the slim growth in the second quarter could yet be revised away.
"The June data on construction and manufacturing inventories were weaker than the Commerce Department estimated and at 0.7% we were already skating close to the edge. If second and third quarter growth rates show negative rates the National Bureau of Economic Research could ultimately classify this as a recession."
Ian Morris, U.S. economist at HSBC, also sees hints that the economy is even weaker in the third quarter than it was during the second.
His analysis of the index of aggregate hours worked - a proxy for the labor input to production - in the July employment report shows a divergence from the consensus view. "Some people thought they saw improvement, but aggregate hours in July were down at a 1.1% annual rate from the second quarter average. If that holds, it suggests a decline in real GDP growth."
"I'm calling for a hard landing: a 1.0% decline in GDP growth both this quarter and in the fourth quarter," said Morris. In addition, he also cites manufacturing inventories and construction data as suggesting that GDP growth in the second quarter could be revised down either to zero or a negative.
The Outlook For 2002
Even among economists who agree that economy will continue to slow in the second half of this year, there are differences on what they expect for 2002.
Of all the pessimists, Morgan Stanley's Greenlaw stands out as the most hopeful.
"If we skirt a recession this year, we'll see a definite pickup next year." Greenlaw said. His forecast calls for a return to growth at a 4.0% clip in the first half of the year.
Others are less enthusiastic.
While Bear Stearns' Ryding sees a bit of a pickup to a 2.5% growth rate in the fourth quarter, he looks for a fall back to only a 2% growth rate in the first half of 2002.
"The tax rebate gives a temporary lift to consumer spending, but when the effect of the one-shot rebate is replaced by a monthly tax cut in January, consumers will feel like their taxes have risen and their disposable income will go down."
Then there's a downright pessimistic view.
"I think we'll only see growth between 1% and 2% in the first half of next year," said Morris, of HSBC.
But even Morris looks for better days...eventually. His forecast is that the economy will get back to a 3% to 4% growth pace, but not until the second half of 2002.
Then there is the realistic view.
SI's UnBelieveable says "I think we'll only see growth between 1% and 2% all of next year.
But even UnBelieveable looks for better days...eventually. His forecast is that the economy will get back to a 3% to 4% growth pace, but not until the second half of the decade.
-By John McAuley, Dow Jones Newswires, 201-938-4425; john.mcauley@dowjones.com |
