Continued Optimism
Morgan Stanley's Richard Berner and David Greenlaw continue to be optimistic about the U.S. business-cycle recovery over the next two years:
<<Morgan Stanley: ...Moreover, many fear that sluggish growth will return once the impetus from the fiscal stimulus effective in July and mortgage refinancing fades. Indeed, incoming signals have already turned mixed and fourth quarter demand growth likely will be weaker than the third, even with rising employment raising income prospects. It was fun while it lasted, but in our view the adrenaline rush of the upswing in demand growth is over; now come strong but unspectacular gains in demand. Yet a dip in August capital goods orders and shipments, a September decline in vehicle sales from hyper-elevated August levels, and softness in consumer sentiment and purchasing-manager surveys have all raised concerns that the deceleration might be long lasting.
We disagree. To be sure, those hurdles will keep the sustainability debate alive. But as we see it, a sustainable recovery remains the most likely outcome, as four factors assure that the demand side of the equation has more legs than commonly perceived. First, pent-up demand for capital goods and hiring is rising as post-bubble headwinds are fading (see The Drivers of Growth, and When Will the Jobless Recovery End? Global Economic Forum, July 28, 2003 and September 2, 2003, respectively). In addition, the powerful earnings rebound now underway is a classic sign of a sustainable recovery, it will nurture an upswing in capital spending and hiring into 2004 and beyond. Earnings growth will slow next year, but margins seem likely to plateau some 300 basis points above their tough in mid 2001, not fall (see The Earnings Sweet Spot, Global Economic Forum, September 15, 2003). The stimulus from easier financial conditions and fiscal policy is far from over (for example, see Is the Consumer Party Over? Global Economic Forum, October 3, 2003). Finally, the time-honored cyclical dynamics of the inventory cycle seem likely to boost production relative to final demand. With inventory-sales ratios at all-time historic lows, the pickup in demand virtually requires accelerated stockbuilding over the next several quarters... >>
I'm less optimistic for two reasons. First, I trust David and Christina Romer's estimates of the impact of monetary policy, which put it as faster and bigger than past estimates--and which carry the implication that there is little additional push to the economy from interest rate reductions still in the pipeline. Second, my estimate of the productivity growth trend is higher than Morgan Stanley's--so I see a reasonable probability that the "jobless recovery" will continue, and curb the growth of consumer demand.
But it would be very nice if I were wrong this time.
Posted by DeLong at 08:07 PM | Permanent Link |
