| RESEARCH ROUNDUP: Economists expect a deeper slowdown in the U.S. as consumers pull back in light of last week's horrendous events. But fiscal and monetary stimulus, not to mention American resilience, prompt a number of calls for an even stronger rebound further down the road. Morgan Stanley's Stephen Roach: "History tells us that blows like this instill a sense of fear, caution, and retrenchment that puts all but the most essential spending plans on hold." U.S. consumers on hold "well deal a harsh blow to the broader global economy." Particularly at risk, according to Roach, are Asian countries such as Chna that are especially sensitive to U.S. consumption, and Mexico (where exports to the U.S. account for 25% of GDP) and Canada (where exports account for 33% of GDP). On the plus side: heavy stimulus from fiscal and monetary policy. Morgan Stanley's David Greenlaw estimates excess reserves in the banking system on Wednesday were an "astounding" $80 billion, vs. a normal level of $1 billion. In the days surrounding Y2K, excess reserves were less than $5 billion. UBS PaineWebber notes that insurance companies are likely to become forced sellers of bonds to meet rising claims (see "Assessing the Aftermath"). While this would be a negative, insurance company holdings account for less than 2% of the fixed income market and the timing of their sales is uncertain. Foreign investors, which hold nearly 1/3 of the Treasury market and about 22% of the U.S. corporate bond market, may be a larger concern if there is a move toward repatriation or decreased demand for dollar-denominated assets. UBS economist Maury Harris predicts another 50 basis point cut, in addition to this morning's cut, is likely. Salomon Smith Barney notes that the negative reaction in the equity market to events such as Pearl Harbor, the Kennedy Assassination and the invasion of Kuwait was short-lived and "investors were rewarded for believing in the ultimate resilience of the American Spirit and the American economy. We think this will be the case today." The biggest variable will be the impact on the American psyche, but they don't expect Americans to retrench. "Americans, in the past, have responded to direct attacks with anger and resolve, not resignation and despair." CIBC World Markets' Avery Shenfeld notes that "the macroeconomic impact will depend on the scope of the military effort, which remains very unclear." But he adds that during the height of the Gulf War, defense spending added a mere 0.4% to annual GDP growth rates. Upcoming weekly data on jobless claims and chain store sales will be largely ignored due to significant but temporary distortions related to last week's events. Bear Stearns analysts note that consumer confidence plunged 17 points to 84.7 in July 1990 at the onset of Iraq's invasion of Kuwait and did not return to pre-invasion levels until November 1994 (about four years later). Consumer confidence in August stood at at 114.3. |
