BIG PICTURE: A Sustained Upturn Without Pent-up Demand?05 Mar 15:39
By John McAuley Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--A fledgling economic recovery seems to have begun. The
newer uncertainty concerns the question, "can it be sustained?".
Doubts arise in some economists' view that, since the recession was among the
mildest in postwar history, the recovery is likely to be restrained and
vulnerable to fizzling out. Some argue that because the consumer sector grew
throughout the 2001 recession, rising by 3.1% over the year, it lacks the
pent-up demand that tends to build up in more severe recessions and which tends
to produce a strong recovery when the demand is unleashed.
Such a sequence is a fundamental part of the so-called "double dip," or "W"
scenario, which calls for an initial inventory-fueled rebound in gross domestic
product, followed by a renewed pause, or even a downturn, as the inventory
rebuilding ends, followed by lackluster household demand and a failure of
business fixed investment to materialize.
But, the double dip scenario is still a minority view.
"What's wrong with it is that it misses the point of outside influences,"
said Jim Glassman, senior economist at JPMorgan Securities. "There should be a
top-down analysis, but the unsustainable recovery view is a bottom-up one."
Glassman points to a number of outside influences that stand to keep
consumption strong. `First, fiscal policy is very stimulative and second,
monetary policy is even more stimulative," he said.
The JPMorgan forecast calls for a 3.5% annual rate of GDP in the current
quarter, followed by a 5.0% pace in the second quarter, and 4.5% and 3.5% in
the next two quarters. This forecast does, indeed, benefit from a pronounced
swing back toward inventory additions in the second half of the year. But,
there's also solid gains in consumer spending: up at a 2.5% pace in the first
half of the year and at a 3.0% pace in the second half.
But Conditions Are Changing... Fast
The restrained recovery thesis seemed to get some support from Federal
Reserve Chairman Alan Greenspan when he delivered Federal Open Market
Committee's monetary policy report to the House Financial Services Committee
last week.
"Although household spending should continue to trend up, the potential for
significant acceleration in this sector is likely to be more limited than in
past cycles," Greenspan said. He said the FOMC is forecasting growth of 2.5% to
3% in 2002, "a pace (that) is somewhat below the rates of growth typically seen
early in previous expansions."
And yet economic indicator reports in recent days have surprised economists
and others by how strong they have been. Notably, the Institute for Supply
Management's manufacturing index surged to 54.7 in February from 49.9 in
January, breaking an 18-month period in which that indicator was below the
critical 50 level that denotes an expansion/contraction in manufacturing
activity.
Glassman points out that the Fed may even have been caught out by how fast
the impressions about the economy are changing. "The economic forecasts in the
FOMC's Monetary Policy Report were prepared by the Fed staff back before the
Jan. 29-30 FOMC meeting, which was three revisions of our forecast ago."
Indeed, many believe the FOMC itself would have a stronger forecast now.
"The economic numbers have generally been coming in a bit stronger than
expected," noted Jim O'Sullivan, economist at UBS Warburg. "Particularly after
the auto sales data came in stronger than expected, we may have to revise up
our consumer spending growth for the first quarter."
The UBS Warburg forecast calls for 2.0% GDP growth this quarter, with
consumption up only at a 1.0% pace. Over the remaining three quarters,
O'Sullivan and his colleagues look for growth accelerating to a 3.0% rate
followed by 3.2% growth in the third quarter and 4.0% growth in the fourth
quarter.
But, "there's a risk of a pop in growth in the first half of the year. We
had always thought that second half growth would be stronger, which may still
be true, but the surprises in the first half have been to the upside," said
O'Sullivan. The Good News Extends To Inflation
The upside surprises that O'Sullivan refers to are being incorporated into
many forecasts and are not just on the growth side.
"We're leaning toward an upward revision in our first quarter GDP forecast -
to 3.5% from 2.5% - we're just waiting for the February employment report (due
to be reported at 8:30 a.m. EST on Friday)," said Ethan Harris, co-chief
economist at Lehman Brothers.
Harris noted favorable winter weather, a healthy consumer psychology, a
surprisingly strong continuing demand for autos, and the fact that "even
temporary stimulus has a reverberating effect down the road" as a set of
factors that can help sustain the consumer. These forces could easily overwhelm
concerns about a lack of pent-up demand.
Harris also notes that "a striking eye opener has been the performance of
productivity." Nonfarm productivity was originally reported to have grown at a
3.5% annual rate in the fourth quarter, but according to a Dow Jones survey of
19 economists, productivity is due to be revised up to show a 4.5% annual rate
of growth when it is released on Thursday morning reflecting the upward
revision to GDP growth. Stronger productivity growth effectively means the
economy can grow at a faster rate over time than otherwise.
And, as Harris points out, "if the underlying trend growth is faster,
companies can continue to discount their prices, thus fueling demand and
preserving profitability. It's not just a fluke that discounting keeps
occurring."
Harris believes growth could slow a bit in the second quarter, but asserts
that "there is no case for a double dip."
-By John McAuley, Dow Jones Newswires, 201-938-4425;john.mcauley@dowjones.com
(END) DOW JONES NEWS 03-05-02 03:39 PM |
