CORRECTED/Wall St. J.: " Cyberfast slowdown followed by cyberfast recovery ".
.........There is also reason to believe that, in spite of the current gloom, a New
Economy recession may be faster and softer than prior busts. The argument of the
optimists: With financial markets and information technology more dominant,
economic adjustments happen more quickly, and policy actions -- including the
Federal Reserve's latest rate cuts -- will sink in much faster than before.
......."You're subjected to a sharper drop than you would have been in the past,
because of the speed that companies adjust" to changes in the outlook, says
Norbert Ore, who oversees a closely watched survey of manufacturing that set off
alarm bells earlier this week."On the other hand, you can get back to a normal
order pattern much more quickly."
.......Information technology allows companies to sense and respond more quickly
to changes in market conditions. That may explain why capital orders fell so
suddenly at the end of last year. But it may also mean that the recovery happens
more quickly.
----------------------
My take on this:
There is nothing to prevent Alan Greenspan on Monday
or Tues. or any day before Jan. 30,
to lower interest rates.
In the Fall '98, he lowered rates 3 times in 7 weeks.
(The first 2 within 2 weeks )
detnews.com
With CyberEconomy, now, it could be even faster:
Let's say.... at 100 mbps ?
He has a clear psychological emergency of Market Confidence
at hand. It needs immediate tratment.
Another 0.25% or 0.5% decrease next week...or whatever
it takes to calm the Market down,
all IMHO of course,
:-)
TA
============================================================================
interactive.wsj.com
January 5, 2001
Page One Feature
Capital Markets and Technology
May Bring an Even Deeper Decline
By GREG IP, NICHOLAS KULISH and JACOB M. SCHLESINGER
Staff Reporters of THE WALL STREET JOURNAL
How will this downturn be different?
-----------------------------------------------------
(Answer: Because of the Stock Market and Cyberfast New Economy. )
A lot has changed in the nearly 10 years since the U.S. economy last faced
recession. The stock market has become a much more powerful force in the
economy. Business spending on high technology has soared. Productivity is
growing at much faster rates and boosting wages. Information about the economy
moves faster and more freely than ever before, thanks largely to an Internet known
to only a comparative few during the last recession.
In many ways, the economy has been remade. Now some fear that the
New Economy, which fueled the boom, could also deepen a bust.
The new power of Wall Street could mean that even a garden-variety bear market
can have a bigger impact on how wealthy consumers feel and spend. Information
technology's big share of capital expenditure may sharpen the economic pain when
businesses slash their technology budgets, as many are now doing. Workers could
suffer sooner if heightened efficiency means companies start trimming payrolls
more quickly, causing confidence and consumer spending to plummet. The recent
surge in weekly claims for unemployment insurance could be a harbinger of that.
There is also reason to believe that, in spite of the current gloom, a New
Economy recession may be faster and softer than prior busts. The argument of the
optimists: With financial markets and information technology more dominant,
economic adjustments happen more quickly, and policy actions -- including the
Federal Reserve's latest rate cuts -- will sink in much faster than before.
"You're subjected to a sharper drop than you would have been in the past, because
of the speed that companies adjust" to changes in the outlook, says Norbert
Ore, who oversees a closely watched survey of manufacturing that set off alarm
bells earlier this week. "On the other hand, you can get back to a normal order
pattern much more quickly."
Indeed, for all the handwringing these days, it's still far from certain the economy
is actually anywhere near a recession. Lehman Brothers economists Thursday
issued a forecast stating that the most likely outlook for 2001 is gross domestic
product growth of 3% to 4%, with only a 15% chance of growth at 1% or less.
Here are three important ways in which this downturn could prove different.
The stock-market tail wags the economy dog.
The 10-year bull market has enriched millions of Americans, many of whom
joined the shareholder class only in the past decade. At their peak last March,
stocks were valued at 181% of annual gross domestic product, according to
Bianco Research, up from 60% at the beginning of the decade. And between 1989
and 1998, the number of Americans owning stocks, directly or through funds, rose
to 84 million from 52.3 million, according to the New York Stock Exchange.
The surge in stock wealth was a huge boon to the economy. Households felt
wealthier and more secure, and spent more. The Fed estimates that this "wealth
effect" added a full percentage point to economic growth in recent years. That
means movements in stocks can overwhelm other key factors, such as a Fed rate
increase or cut.
"The economy is more sensitive to stock prices than to interest rates,"
says Ray Dalio, president of money manager Bridgewater Associates.
The corollary, however: A fall in the market has a much bigger economic
effect. Through Tuesday afternoon, the Wilshire 5000, which tracks almost
every tradable stock in the U.S., was off 20% from its high last March. That
appears to have played a major role in the sharp slowing in growth in the second
half of the year and in December's plunge in consumer-confidence gauges.
Indeed, stock prices, which have traditionally responded to expected
economic activity, now are just as likely to be the cause of that activity.
Barbara Tobias, a full-time trader living in West Hollywood, Calif., certainly felt
the wealth effect. She spent nearly $1,000 on Christmas presents in 1999. But she
scrapped her gift-giving plans this winter after her portfolio plummeted to just
$380,000 from a high of $2.2 million. "My husband brought me a red rose. I
bought him a card," says Ms. Tobias, who didn't give any gifts to about 10 other
people who normally make her Christmas list.
To be sure, the sell-off in stocks of the last 10 months may not faze investors still
sitting on enormous profits from the run-up between 1994 and 1999 or those who
avoided technology shares. But even investors who made money last year are
scaling back. Dan Gentile, a financial analyst who lives in Cincinnati, says it was
easy to pull out cash from his brokerage account to pay for fancy meals and other
extras when his portfolio was climbing 40% or 50% a year. But with his portfolio
up just 10% in 2000, Mr. Gentile has put off plans to spruce up a spare bedroom.
He hasn't gone out for an expensive dinner for about five months.
Mr. Gentile calls last year's 10% gain "the bare minimum I can accept. I didn't
really feel there was any extra in there."
But just as financial markets can exacerbate downturns, they can also mitigate
them. One reason is that investors may respond quickly to a cut in Fed interest
rates -- as they did with Wednesday's huge rally in response to the surprise
reduction of half a percentage point in short-term rates. That instantly eased some
of the pain that had spread through the economy.
The stock market "has become the most important transmission mechanism of
monetary policy," says Jan Hatzius, senior economist at Goldman Sachs. And
that's one reason, adds Brad DeLong, an economist at the University of California
at Berkeley, that "Fed moves have a bigger effect now."
It's not just the stock market but the growing role of financial markets in other
sectors, notably housing. Now that so many mortgages are financed in the
market for tradable, mortgage-backed securities, mortgage rates respond instantly,
and sometimes months in advance, to actual or expected Fed moves. Along with
the boom in refinancing and home equity loans, a quick drop in rates can lead to a
quick rise in mortgage activity.
Just since the Fed move Wednesday, Countrywide Home Loans, a subsidiary of
Countrywide Credit Industries of Calabasas, Calif., has seen calls from
homeowners interested in refinancing shoot up 30%. With long-term market rates
falling in anticipation of the Fed move, calls have increased more than 500%
since the beginning of December. "We have employees literally living here right
now," says Doug Perry, a company spokesman. "Volume is just so high."
The double-edged sword of technology.
interactive.wsj.com
A pillar of the New Economy has been corporate America's heavy investment in
computers, software, communications networks and Internet infrastructure, all
aimed at enabling them to produce more, better products for the same or lower
costs. Spending on information technology has accounted for a big part of
economic growth -- almost 40% in the first three quarters of last year, according
to Deutsche Asset Management.
All that technology has also helped boost labor productivity -- the quantity of
goods and services produced per hour of labor -- and has held down costs. That
has helped the economy grow faster without generating inflation.
But technology spending may have its downside. The enthusiasm with which
corporate America splurged on technology in recent years was driven by cheap
capital and expectations of ever-rising returns on technology investments. The
sharp economic slowdown now raises the risk that corporate America
overinvested in technology, creating troublesome excess capacity in some areas --
fiber-optic lines that are only partially used, for example.
Moreover, while decisions to build a brick-and-mortar plant aren't easily
reversed, decisions to ramp up technology spending often are. You can buy
software in minutes over the Internet, notes Bill Dudley, chief U.S. economist at
Goldman Sachs; and you can cancel an order just as quickly.
That's what Inktomi Corp., a Foster City, Calif., maker of Internet infrastructure
software, discovered last week. In the dying days of the quarter, many customers
suddenly postponed orders or revised them from multimillion-dollar deals to
million-dollar deals. The deals had been negotiated and the pricing set, but when
they got to executives' desks for final approval, many "showed reticence to do
large capital outlays at this time," said David Peterschmidt, president and chief
executive, in a conference call Wednesday with analysts.
Tech spending may also be more sensitive to the vagaries of the markets than
other types of investment. A sizable chunk of the investment in communications
and computing gear in recent years has been by early-stage companies in
telecommunications and e-commerce or by more mature companies competing
with such start-ups. As Nasdaq collapsed, making it more difficult for young
companies to issue stock, and the junk-bond market turned hostile, doing the same
for telecommunications carriers, that rippled back into order books for companies
ranging from Lucent Technologies Inc. to Inktomi, which told investors that many
of its customers cited limited access to capital markets.
The falling stock market has both a financial and psychological impact. Jerry
Kennelly, Inktomi's chief financial officer, says, "All of America feels poorer.
Corporate executives, families, widows. And when people feel poorer, they
hesitate."
Between the quickness of corporate America to trim expected outlays and the
damping impact of falling stock prices, economists are expecting a sharp
deceleration in the growth of spending on information technology this year. Joshua
Feinman, economist at Deutsche Asset Management, thinks that because of a major
deceleration in tech spending -- which accounted for almost half of all business
investment in the first nine months of 2000 -- growth in business investment will
slow this year to "mid-single digits" from its 12% annual rate of recent years.
Yet the after-effects of overinvestment in technology are likely to be much less
pronounced than those of previous investment busts. In the 1980s, a frenzy of
real-estate investment saddled the U.S. with commercial office space that took
years to fill. During that time, new investment in such properties almost ground to
a halt. By contrast, business equipment and software depreciate in just a few
years, if not months. "Rapid depreciation means that any excess capacity should
be eliminated relatively quickly," says the Bank Credit Analyst, a
financial-forecast journal.
Indeed, while some customers are shying away from purchasing Inktomi's
software products, that won't affect the demand Inktomi expects from customers
who need upgrades to systems they've already purchased. Such business already
accounts for about 40% of Inktomi's sales, Mr. Kennelly says, and he expects that
to rise to about 60% as the company matures. As for those who pulled back from
purchases outright, he says the sort of technology his company supplies, which
makes it cheaper and easier for Internet users to view data on distant servers, is
so fundamental, "those people will be back."
At the same time, the way companies use all the tech equipment makes them more
efficient and more likely to avoid a prolonged downturn. Information
technology allows companies to sense and respond more quickly to changes in
market conditions. That may explain why capital orders fell so suddenly at the end
of last year. But it may also mean that the recovery happens more quickly.
"Companies have more tools to reduce inventories more quickly," says Mr.
Ore of the National Association of Purchasing Management and vice president of
purchasing for Chesapeake Display & Packaging Co. in Winston-Salem, N.C.
"Consumer-products people can revise their widget-selling plans quite often,
whereas there used to be just annual sales forecasts a few years ago," he adds.
Job loss: The dark side of productivity?
A central element of the New Economy is that annual productivity growth has
soared, to as much as 3% currently from about 1.5% from the early 1970s
through the mid-1990s. That means gross domestic product can grow faster --
perhaps around 4% a year -- without triggering inflation, and keep unemployment
low.
But if growth slows below 4%, then companies may shed workers in large
numbers and send unemployment soaring, even if the economy stays out of
recession and grows at, say, 2%, a level once considered healthy.
"Two percent will feel like a recession in terms of the what it means for the labor
market," says Goldman's Mr. Dudley. "It would mean we'd see a
one-percentage-point increase in the unemployment rate over the next 12 months,"
to 5% from about 4% now.
A steady uptick in weekly claims for unemployment insurance suggests that
that is happening, and the Labor Department's release Friday of the
December unemployment report could shed more light on that trend.
Nacco Industries Inc., a Mayfield Heights, Ohio, manufacturer, earlier this week
announced plans to eliminate an Illinois forklift-assembly plant, putting 680
people out of work. The company isn't cutting capacity; it's just getting more
output now from fewer workers, because of consolidations and what it calls
"demand flow technology."
"A lot of the industrial folks that are being laid off are coming out of very
long-term union positions," says Shawn Hoffman, who works as a manager and a
recruiter at Time Services Inc. in Fort Wayne, Ind. "In some cases, they're leaving
jobs where those types of jobs don't exist or certainly don't exist in any great
quantity any longer."
And yet the legacy of high growth -- and the resulting tight labor markets -- may be
that unemployment continues to stay low during a slowdown, rather than spiking
up. That was true through November, at least, when the unemployment rate barely
budged from a 30-year low, despite spreading economic gloom.
The reason: "The No. 1 problem for businesses over the last several years has just
been finding people," says Mark Zandi, chief economist at Economy.com in West
Chester, Pa. "We may, in fact, see some hoarding of labor," he adds as executives
still worry more about maintaining a long-term labor force than responding to
cyclical downturns.
Indeed, plenty of workers so far who've lost jobs have been able to find new ones
very quickly.
For Miranda Stamps, a 23-year-old working at e-commerce business consulting
firm Knowledge Strategies Group, her layoff was swift and unexpected. She got
the news the week of Thanksgiving that she had to leave the company after just
three months, with "10 days of health care and two weeks of salary with New
York City rent to pay."
But she quickly got an interview at Ernst & Young International, where she had
been an intern once. "Two weeks and one day after I got laid off, I had a new
job," she says. Ms. Stamps says that her new position as a project manager at
Ernst & Young is a better job, with a higher salary and in a field she's more
interested in. "Getting laid off was traumatic, but in the end it worked out better
for me."
The retail sector also still has an appetite for workers. Before Montgomery Ward
had even announced that it was closing its doors for good, other companies started
calling to see if there were workers to hire. "Calls started coming in the day
before, because there were rumors floating around," says Montgomery Ward
spokeswoman Joyce Pemberton. Retailers including Sear's, Wal-Mart, Kohl's and
Target all called to inquire about available workers. "That wasn't all though,"
says Ms. Pemberton. "I got calls from headhunters, accounting firms -- a little bit
of everything."
-- Patrick Barta and Ruth Simon in New York and Timothy Aeppel in Pittsburgh
contributed to this article.
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