Bears Refuse to Go Into Hibernation
Wall Street: Shrugging off recent encouraging news,
some analysts see much worse for economy and stock
market.
By THOMAS S. MULLIGAN, Times Staff Writer
NEW YORK--The Nasdaq composite index just
posted its first quarterly gain after four straight losing
quarters, yet Wall Street's bears seem more confident
than ever in their grim outlook.
Reality hasn't finished biting the stock market, such
professional pessimists say.
A U.S. economic recession probably is underway, the
bears contend, and a global recession is a growing
possibility. Investors soon will realize that corporate
profits aren't bouncing back until 2002, if then, they say.
Once that news sinks in, stocks--still pricey by historical
standards--will swoon again.
Although the Federal Reserve Board has been
slashing interest rates with near abandon, and taxpayers
within weeks will begin receiving checks under President
Bush's tax-rebate program, the bears believe both
measures will prove to be too late to stave off deeper
economic woes.
In many respects, the bearish case isn't
new--which is why the majority of Wall Street pros
don't buy it.
Some of the pessimists' dire predictions about stock
market valuations did come true when the Internet
bubble burst. But the depressions, bank panics, real
estate collapses and other catastrophes foretold by the
most extreme prognosticators during the 1980s and
1990s seem as unlikely today as they did when the
technology bull market was in full flower.
Still, the bearish case has some key fundamentals on
its side for the first time since the early 1990s:
overcapacity and strained credit afflicting many
industries, a weakening economic picture overseas
and--above all--a U.S. consumer chin-deep in debt and
unable to maintain the spending that has been carrying
the economy for the last year, the bears say.
"If the consumer can keep the faith and kind of not
look at the facts, maybe we can work some magic here,
but it's tough with the job market going the way it has
been," said Lakshman Achuthan, managing director of
the Economic Cycle Research Institute in New York.
Initial state unemployment claims, for example,
increased at an annualized rate of 41% in the second
quarter, compared with a year earlier. That is the
steepest year-over-year rise in such claims since the
1980 recession.
On Friday, the government said the economy shed a
net 114,000 jobs in June, capping the biggest
three-month job loss since the 1990-1991 recession.
The National Bureau of Economic Research, official
arbiter of U.S. business cycles, watches four key
indicators: industrial production, manufacturing and
trade sales, employment and personal income. Except
for income, all the barometers are pointing down, some
to an extent previously seen only in recessions,
Achuthan said.
"If it's not a recession, it's the worst non-recession
we've ever had," he added.
More optimistic observers took heart last week from
two indicators of unexpected vigor in the manufacturing
sector. Monday, the National Assn. of Purchasing
Management reported that its index of manufacturing
activity showed the pace of decline in the sector was the
slowest since November. Tuesday, the Commerce
Department said factory orders jumped 2.3% in May.
Nonetheless, the Economic Cycle Research
Institute's proprietary indexes of leading and coincident
employment indicators have been flashing recessionary
signals since late last year, and they're warning that
employment isn't likely to turn around before next year.
"There's a lot more to come" of layoffs and cost
cutting that companies have been undertaking in recent
months, said Robert B. MacIntosh, chief economist at
Eaton Vance Management in Boston. "I don't think a lot
of companies have come to grips with the problem yet."
The problem for business, as MacIntosh and other
economists see it, is excess capacity caused by years of
overinvestment.
The phenomenon has been easy to spot in such
industries as telecommunications because it has been
marked by an implosion of stock market values. But the
problem is broader than telecommunications or even
technology, analysts say.
The remarkable improvement in information
technology in recent years has enabled business
managers to sense weakening demand earlier than ever
and avoid the kind of inventory buildups that used to
cause cyclical downturns all by themselves.
But slumps caused by inventory backlogs tend to be
milder and briefer than what's facing us now, Achuthan
said.
Capacity utilization at U.S. factories is at the lowest
level since 1983, he noted. Thus, even if business picks
up, it will be some time before manufacturers feel the
need to invest in new plants and equipment. That will
make any recovery more sluggish and fragile, Achuthan
said.
Normally, a Fed-easing campaign as aggressive as
the current one--2.75 percentage points of rate cuts in
six months--could be expected to spur business
investment. But if companies already have more
machines, more warehouse space, a bigger fleet and
more computing capacity than they can use, the Fed
may end up with the classic dilemma of "pushing on a
string"--offering credit to borrowers who have no need
for it.
The global picture also is increasingly gloomy, some
economists say.
U.S. recoveries from the recessions of the early
1990s and early 1980s came about partly with the help
of more vigorous economies overseas. Most of Europe
was still growing during the U.S. recession of 1990, and
Japan remained strong during the 1981-82 recession.
Now, "We're set for the first synchronous global
recession since 1974-75," argued Austin, Texas-based
economist and money manager Van R. Hoisington.
"This is not a forecast--it's happening."
Economic growth rates in Japan, Taiwan and Mexico
are close to zero if not actually negative, and Europe's
two biggest economies, Germany and France, have been
weakening steadily in recent months.
"Having the three big engines [the United States,
Japan and Europe] all standing idle at the same time is
highly detrimental to global activity," Hoisington said.
The continued strength of the dollar against foreign
currencies has badly hurt the U.S. manufacturing sector.
The positive flip side is supposed to be that foreign
factories and economies keep humming as they ship
their cheaper goods our way. At present, though, the
American consumer's appetite for imports isn't strong
enough to balance the weakness in other markets,
analysts say.
"World trade is shrinking," Hoisington said, and the
process could get worse if the erosion of U.S.
manufacturing jobs sparks greater protectionist
sentiment.
Since April 1998, 1.4 million manufacturing jobs
have been lost. Because they are relatively high-paying
jobs that tend to create supporting service-sector jobs,
such losses make a big splash in the affected
congressional districts, making protectionism a politically
enticing option.
If foreign trade isn't about to restart the economy,
what about the consumer sector? Consumer spending
accounts for two-thirds of gross domestic product, and it
has been the most reliable part of the growth equation
for years.
Monday, the Commerce Department reported that
consumer spending rose an unexpectedly strong 0.5% in
May. But Thursday the department said it had erred,
and revised the figure down to 0.3%. And increasingly
in recent weeks, major retailers have warned that sales
growth dimmed substantially as the second quarter
progressed. Federated Department Stores and Longs
Drug Stores were among the retailers issuing downbeat
sales forecasts last week.
If consumers haven't exhausted their spending
capacity, it's likely to happen soon, said David A. Levy,
vice chairman of the Jerome Levy Economics Institute
in Mount Kisco, N.Y.
The debt-service burden on consumers--mortgage
and consumerdebt payments as a percentage of
household disposable income--is approaching the
all-time highs of the mid-1980s, Levy said last week.
The debt-service burden peaked at 14.38% of
income in the fourth quarter of 1986. After easing back
under 12% in the early to mid-1990s, the level rose
more or less steadily until it hit 14.28% in the fourth
quarter of last year, the most recent number available.
That average figure may seem low to many
consumers with fat mortgages, but that's because it is
measured economywide--including millions of
Americans, especially retirees, with low or no debt.
The statistic is worse than it appears, Levy said,
because auto leases--an increasingly popular way to
finance cars--don't show up in the numbers, whereas
conventional auto loans do.
[My note: My Toyota sources tell me that 67% of new car sales in the US are leased]
Measured another way, in terms of total household
debt outstanding as a percentage of disposable income,
the stress is at an all-time high. Households now
maintain a record average of $1.05 in total debt for
every $1 of income.
Theoretically there is a limit to how much debt
consumers are willing to take on to maintain their
spending, and Levy believes the limit is close at hand.
He predicted that, faced with increasing layoffs and
other kinds of cutbacks on the job, consumers are in the
process of reining in their spending and devoting more
attention to repairing their personal finances.
If consumers decide to use most of their tax refunds
to pay down debt rather than buy more goods, as Levy
thinks is likely, the economic stimulus of the tax cut will
be muted. And without robust consumer spending, the
bears contend, it is hard to make a case for a rebound in
corporate profits until 2002 at best.
Therefore, it is only a matter of time before investors
face the facts and again begin marking down stock
valuations from their historically high levels, the bears
insist. The spring market rebound, they say, was based
on a profit recovery that now appears illusory.
Stock market naysayers such as Dallas-based David
Tice of the Prudent Bear Fund say another setback for
the market will dispel the belief that every drop is a
buying opportunity.
The next down leg, he predicts, will be a long one.
* * *
Grim Outlook for Jobs
A key measure of the U.S. employment picture, the
Coincident Employment Index tracked by the Economic
Cycle Research Institute, has fallen into territory
previously seen only during full-fledged recessions. The
index tracks job growth, layoffs, the size of the labor
force and other employment trends.
* * *
CEI growth rate (monthly percent change,
annualized)
May 2001: -0.6%
Source: Economic Cycle Research Institute
* * *
Calm Before a New Storm?
The Nasdaq composite stock index resurged in the
spring from the two-year lows reached April 4. But Wall
Street's bears argue that the technology-dominated index
is poised to fall again as investors give up hope for a
near-term recovery in corporate profits.
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