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Technology Stocks : All About Sun Microsystems -- Ignore unavailable to you. Want to Upgrade?

To: High-Tech East who wrote (42140)	3/16/2001 9:36:23 PM
From: High-Tech East	Read Replies (1) \| Respond to of 64865

MSDW - JDN's favorite economic writers <g> -- Ken Wilson The latest views of Morgan Stanley Dean Witter Economists - Mar 16, 2001 Global: Betting Against the Odds - Stephen Roach (New York) Recessions, by definition, are low-probability outcomes. There is an inherent resilience to the world economy that cautions against betting on a downturn. What gives us the audacity to buck these odds? There can be no mistaking the lessons of history: The chances of outright recession are low enough to give any forecaster serious pause for thought before going out on that proverbial cyclical limb. Consider the case of the United States. Of the 200 quarters from 1950-99, real GDP contracted only 14% of the time. Moreover in the 1980s and 1990s, the incidence of "negative growth" quarters dropped to around 10%. Even in Japan -- the land of seemingly recurring recessions -- outright declines in economic activity are the exception, not the rule. For example, during the 1990s -- the Japanese economy’s weakest period of the post-World War II era -- real GDP fell in "only" 35% of the 40 quarters. Notwithstanding Japan’s unusual circumstances, there can be no mistaking the industrial world’s bias toward growth and expansion. Yet our baseline forecast continues to point to the contrary -- two quarters of outright contraction for the US in the middle periods of 2001 and a global economy that I have repeatedly characterized as being on the brink of worldwide recession. The odds cited above are daunting, to say the least -- holding out the distinct possibility that we could be wrong and that the US economy finds yet another escape route from the latest recession scare. The US has long been the engine of the global economy. If it miraculously gets back on track, the global train will once again leave the station. That’s the bet that the forecasting consensus is still making. Among the major financial services firms, we remain basically alone with our recession call. Rest assured, we haven’t gone down this road to grab attention as the sole naysayer. We take our charge far more seriously than that. Our US recession prognosis is premised on an analytical framework that we believe remains quite compelling. The same is true of our global call. Inasmuch as few share this conclusion, it’s worth reviewing how we arrived at it. The "recession model" has two building blocks -- the first being the forces of deceleration that took the US economy down to its "stall speed" in late 2000. Five such forces came together to produce this outcome: the lagged impacts of Fed tightening from mid-1999 to mid-2000; higher energy prices; the negative wealth effect stemming from last year’s stock market correction; higher corporate financing costs traceable to the widening of credit spreads; and "cyclical payback" -- the likelihood that the boom of late 1999 and early 2000 borrowed from gains that would have otherwise occurred in late 2000 and 2001. The outcome of this confluence of macro depressants was a GDP growth rate that slowed to just 1.6% in the second half of last year -- only a little more than one-third the average 4.4% pace of the preceding five years. Such a sluggish growth rate left the US economy without a cyclical cushion -- a stall speed that could quickly give way to outright recession, if any shocks were to occur. That’s exactly what happened in the final months of 2000. Natural gas prices quadrupled and Nasdaq took another severe hit. And so, in our view, the recession clock began to tick. The resulting earning carnage only reinforced this cyclical downturn, triggering a wave of cost-cutting aimed at pruning the excesses of both capital (IT) and labor (white-collar workers). Such are the self-reinforcing dynamics of a classic recession. The globalization of the US recession rests on yet another layer of analytics. At work are two over-arching forces -- the rapid dissemination of new information technologies and the globalization of supply chains. As a result, a recession made in the United States has spread with great speed to America’s IT suppliers (principally non-Japan Asia) and its Old Economy manufacturing supply chain (NAFTA partners Canada and Mexico). The resulting deceleration of global trade growth from 12.4% in 2001 to a projected 5.9% increase in 2001 has put renewed pressure on Japan and, to a lesser extent, Europe. Lacking in monetary and fiscal policy options, Japan’s macro response has been to let the yen go -- a development that could prove quite problematic for Japan’s East Asian competitors. Global recession in this climate hardly seems like a stretch. Our current baseline forecast of 2.7% growth in world GDP in 2001 is only 0.2 percentage point away from the official global recession threshold. Given the downside risks to our Asian growth outlook, I suspect our global forecast will pierce that barrier shortly. As compelling as this case may seem -- especially to those of us who embrace it -- there is certainly a nontrivial chance that we could be wrong. Every once in a while, a Teflon-like US economy has shown an uncanny knack to go right to the brink of recession and then back off. That was the case in the first half of 1995, when annualized real GDP growth slowed to just 1.1% in response to the aggressive Fed tightening of 1994. It was also the case back in early 1986, when a strong dollar took a big enough toll on Smokestack America to raise recession warning flags. At the time, these downshifts felt very much like recession. But they both turned out to be nothing more than "growth scares" -- followed by a prompt resumption of economic vigor. The same, of course, was true of the broader global economy in the depths of the financial crisis of 1998. A financial market meltdown had once again taken us to the precipice -- only to reveal an unexpected way out. With another one of those painful moments of truth at hand, I am the first to concede that the odds still suggest caution in leaping to recessionary conclusions. We make that leap of faith with all due respect to the odds. Initially, this cycle was quick to turn, as the US economy went from hyper-growth of 6.1% in mid-2000 to stall speed by the end of the year. But now the grind is slower and more deliberate. At the same time, the data flow offers as much ambiguity as ever, leaving the endgame very much in doubt in the eyes of many. Yet in the end, our call rests on analytics. As we see it, the cyclical die has been cast. The recession that was made in America is now spreading around the world. This is one of those rare moments when I believe it pays to bet against the odds and a still sanguine forecasting consensus. As always, time will tell -- and probably a good deal sooner rather than later. msdw.com