U.S. caught between bust and boom
Economy could stall while it climbs out of recession
“The swagger of the legendary American consumer is starting to look more and more like that of a drunken sailor,” Morgan Stanley Dean Witter chief economist Stephen Roach said in a commentary published Friday. As the jobless rate has gone up and real income growth has disappeared, consumers have financed the latest spending binge out of money they should be putting into savings during a recession, and a payback is inevitable, Roach argues.
“To me, all this still speaks of an imminent relapse in consumer demand, precisely the stuff of the classic double dip,” Roach said. “The fact that it hasn’t happened yet doesn’t mean that it won’t.”
TA
==============================================================
U.S. caught between bust and boom
Economy could stall while it climbs out of recession
By Martin Wolk
MSNBC
Feb. 15 — Friday’s report that consumer sentiment slipped in early February injected a note of doubt into the widespread perception that the nation’s economy slowly is climbing out of recession. Most analysts believe the economy is still on track for a rebound, and they caution against reading too much into a single report. But it likely will be months before consumers and investors truly gain confidence that the economy will not slip back into negative territory.
IN OTHER WORDS, the economy could be stuck in a no-man’s land between boom and bust, keeping a lid on stock prices for months, particularly as concerns continue to spread about the credibility of corporate earnings in wake of the Enron scandal.
The Dow Jones industrial average itself has bobbed around the 10,000 level most of the year, ending below the watermark Friday although it gained 1.6 percent for the week. The Nasdaq composite index, which has been hit harder by Enron-related accounting concerns, fell 0.75 percent for the week and already is off more than 7 percent for the year to date.
By itself, the latest report from the University of Michigan showing that consumer sentiment weakened for the first time in five months was hardly enough to raise fears that the economy is coming off the tracks. The survey often reflects financial market conditions, and many analysts said the Enron scandal and resulting market downturn likely made many consumers more pessimistic about future prospects.
What consumers say and what they do are too different things, of course, and this week’s stronger-than-expected report on retail sales showed that consumers are still spending freely at the mall despite a sharp rise in unemployment. That is crucial because personal consumption accounts for more than two-thirds of the nation’s economic activity.
“The swagger of the legendary American consumer is starting to look more and more like that of a drunken sailor,” Morgan Stanley Dean Witter chief economist Stephen Roach said in a commentary published Friday. As the jobless rate has gone up and real income growth has disappeared, consumers have financed the latest spending binge out of money they should be putting into savings during a recession, and a payback is inevitable, Roach argues.
But with the economy at a turning point from shallow recession to likely sluggish recovery, there is enough room for doubt that at least one leading Wall Street analyst still expects a so-called “double dip” in gross domestic product before a robust rebound begins next year.
Most economists disagree with Roach, including Morgan Stanley’s own chief U.S. economist, Dick Berner, who argues that aggressive cost-cutting and a resurgence in economic growth will trigger the beginning of a “virtuous circle” of rising earnings and increased capital spending by businesses.
Dave Orr, outgoing chief economist at Wachovia Securities, stakes out a middle ground, saying that neither a boom nor a double dip are likely in the near term. But because financial markets already have built in expectations for a healthy economic rebound, that slow-growth scenario could leave investors with uninspiring results for a while.
“It will take evidence of boom or double-dip to change the stock and bond market psyche, and in our view neither is likely for the foreseeable future,” he said in a note to clients.
Paul Kasriel, chief economist at Northern Trust Co., also stands somewhere in the middle, predicting that a double dip is unlikely unless the Fed begins raising interest rates again too soon after cutting them 11 times last year. Certainly Friday’s report of a modest 0.1 percent increase in producer prices contained no reason for inflation-wary central bankers to consider a near-term rate hike. As long as inflation remains subdued and signs of an economic rebound are less than rock-solid, the Fed likely to leave rates alone for most of the year, Kasriel and others believe.
Retail sales indeed have been surprisingly strong, said Kasriel, citing weekly reports that have shown strength into early February. “Right now it does not appear consumers are going on strike,” he said. Overall retail sales fell 0.2 percent in January, but that was because of a 4.3 percent decline in automotive sales after the rush late last year to take advantage of zero-percent financing offers.
But Kasriel acknowledged there are reasons to worry about the ability of consumers to maintain their rate of spending. “The fact is consumers are borrowing aggressively,” he said. “Interest payments as a percentage of earnings are high, and probably moving up.”
Last year’s great source of cash, mortgage refinancing, has largely disappeared as rates have risen, and most homeowners who were interested already have taken advantage of their available equity. “There definitely is cause for concern that consumers will have to be a bit more thrifty going forward.”
But Kasriel said there is one “consumer” just beginning to enter the picture with plans to ramp up spending aggressively this year: The U.S. government.
The war on terrorism already has forced Congress to loosen its purse strings, and President Bush has asked for up to $48 billion more for defense this year, boosting the Pentagon budget by 15 percent. Perhaps partly as a result of the increased government spending, manufacturing production held steady in January, the first time in six months the hard hit sector has not shown a decline.
“It does appear we’re starting to see a bottoming out and even a little bit of a recovery in the manufacturing sector,” Kasriel said.
Many postwar recessions have included some kind of double dip, including the 1981-82 downturn, and Lehman Bros. economist Drew Matus acknowledged that one is possible this time around, particularly if confidence stalls and the stock market heads south.
“If the consumer finally shuts down just as inventories and factories are kicking in, that is a concern you have to watch out for,” Matus said. And because of that, the Fed is unlikely to raise short-term interest rates until the fourth quarter, Matus said.
Matus points out that economists consistently have underestimated the resilience of consumers through this unusual recession, and largely on the strength of January’s retail sales the brokerage this week raised its first-quarter GDP projection to 1.5 percent from 0.5 percent.
If the economy continues to slowly gain steam throughout the year, as Lehman projects, it would be the mildest recession of the postwar era, considering that only one quarter of negative GDP has been recorded so far. |
