SMA's 18th Annual economic forecast by economists Hale and Mount
**This was posted in a hightech newsletter I get...I'm a member of the SMA (The Strategic Management Association) but could not attend their program last night...Here are the notes on the economic forecasts...-s2
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Date: Wed, 15 Jan 2003 07:24:15 -0600
To: ron@themayreport.com
From: Jon Paul <jpaul@mba1980.hbs.edu>
Subject: talk last night
Good event at SMA last night, co-sponsored by the ACG and the HBS Club of
Chicago, with some good networking beforehand and always important, good
food. It featured two economists, David Hale, who is no longer at Zurich and now has his own consulting practice and Greg Mount of Banc One. They both gave their outlook on 2003 and like most economists, began with what happened in 2002 and before. Good recaps of how we got in the mess we are in. However, they both mentioned that 2002 was better than people would have expected and actually quite extraordinary to have 3% growth in spite of the world scandal, corporate scandals, Iraq and other problems. There were strong productivity gains on the business front, even though we are still trying to figure out how to get the most out of all that technology spending. Because there is still some inventory overhang and 2002 was a good year to take hits on expenses, those gains did not show up in corporate profits. They feel Bush and the government are committed to strengthen the economy and not let the terrorists win. Besides being bullish on the US economy once the inventory flushes through, they also pointed out some bullish, but speculative views on Iraq- that a war seems to be coming by end of Q1 or sooner, but that it should be a quick win with potentially a good drop in oil prices.
Only thing missing from the presentation were economist jokes. You have to love a group that likes to pick fun at themselves. Here are some from the past I heard from economists, starting back about 10 years ago at a black tie dinner at the Waldorf Astoria, hosted by the chemical industry when I was CFO for a pharmaceutical firm, as told by a major NYC economist who was the keynote speaker:
An economist is someone who has something that works in the real world, but wonders if he can get it to work in theory. If you laid all the economists in the world end to end, you still would not reach a conclusion An economist is someone who knows 1000 ways to make love but does not have a partner An economist is a person who always wanted to be an accountant, but did not have the personality Have you heard about the extroverted economist? He looks down at your shoes.
(Again- these were told by big hitter economists poking fun at their peers. I think every economist I have heard talk were very extroverted and showed great personality- even if you don't get what they are saying they are good to see just as great examples of good public speaking. How they keep up with all that material is beyond me.)
So much for the high spot review and the humor. The attachment covers the details
Economic Forecast
Strategic Management Association,
Harvard Business School of Chicago,
Association for Corporate Growth
January 14, 2003
David Hale
International Economist
and
Greg Mount, Bank One
Deputy Chief Economist and Senior International Economist
Greg Mount
* What has happened
o Recession
* One of mildest in record
* Yet it still hurts
* Unemployment rising
o Why Does It Feel So Awful
* Looks a lot like 90-91
* Pressure on CEO from shareholders
* No longer can easily name successor
* All it takes is one bad quarter
* Corporate malfeasance scandals
* Loopholes have been closed
o What is Good
* Shattered productivity gains during a recession
* Cost cutting
o What It Means
* Still hurts for employees
* Still working through inventory
* Finally get back down to levels it should be
* Lots of capital gain type losses from sale of inventory
o Metrics
* Government- looking at year over year productivity
* Corporations- have to book losses on inventory
* Government numbers more reflective of current operations
o Inventory Overhang
* Once it clears out, should be big rise in profits
* Productivity gains means more profits on future production after old
inventory cleared
* Companies more productive per unit produced
o What If They Can?t Cut Anymore?
* Doesn?t believe so
* Think there are still gains to be had
* Takes time to get used to new technology
* Often as much as 20 years
* Electronic motor example- took 20 years before they realized you no longer
need vertically integrated factory buildings
o Led to more productive horizontal factories
o Internet
* Will take 10 plus years to still see full benefits
* Essence of it- makes information cheaper
* Bringing Internet technology in-house, paying lower wages
* Will take time to see the information productivity to take place o What He Sees
* Still have consumes who are hurting buying things like cars
* Bullish about rise in corporate profits
* Economic recovery that looks a lot like the 90?s
* Will last awhile
* Difference
* No longer a surplus, but a deficit
* Labor market will tighter faster
* Since starting at 6% versus 9% out of prior recessions
* Jobless recovery so far
* But will be optimistic about jobs as it turns
* Expects mild capital spending for 2003
* Housing- in line, not a bubble
* Inflation
* Dead horse right now
* Productivity gains not pricing will drive higher profits
David Hale
* No longer at Zurich, has his own consulting firm, Hale Advisors
* Year Just Ended
o Calls it a period of extraordinary luck
o 3 % growth despite bad event
o World events
o Stock market dip
o Corporate scandals
o Pending war with Irag
* How Did We Do It?
o We were already in recession before 911
o First recession driven by business investments
* Because of unraveling of telecom and technology investments
o Prior recessions were driven by traditional cycle
o Why Investment boom?
* Telecom act
* Internet boom
* Y2K risk
o By end of 2000, all these factors went away
* Y2K was passed
* Telecom firms had faulty plans
* Lots of infrastructure without access
* Internet
* Companies did not have viable business plans
o Result- huge decline in 2001 business investment
* Was not things like drops in housing that drove other recessions
* Where we were on 9/12/2002
o Concern then about hibernation
o Instead, the reverse happened
o Investment began- recovery began
o What went right
* Fed aggressive in interest rate cuts
* Led to powerful impact on housing market
* Triggered biggest mortgage refinancing in history by about 2X
* Often increased size of mortgage to take advantage of capital gains from their homes
* Result in a lot of dollars for consumer spending
* Change in fiscal policy
* Tax cuts
* Defense spending increase
* Corporate tax cuts- stimulate corporate spending
* Move from government surplus to $300 billion deficit
* Change in trade policy
* Post 911 fears that globalization was dead
* As a result, governments decided to step up and show that the terrorists would not win
* Bush got fast track trade negotiations
o Could not be amended by Congress
o Countries felt better about dealing with the US
* Sadly Chicago did not play a role in this process
o Congressmen from here aligned themselves with the protectionists o Consistent with past years, even though we are considered to be a global
trade city
* Tremendous growth rate of US productivity
* Leads to 2-3% growth in real wages
* Combined with mortgage refinancing, led to good increase in consumer
spending
o Looking Ahead
* Growth rate slowed in final quarter
* But he expects to see initiatives to get growth in track
* If economy is still weak, will expect rates to drop more
* Money market rates could fall as low to 50-75 basis points
* Could be less than fees for money market funds
* New fiscal package
* Focuses on stock market as driving force
* Abolish taxes on dividends
* Change in how capital gains are taxed
o Figure in changes in retained profits as well
* Dividend tax cuts proposed before
o Carter failed in 77 because high growth companies resisted- thought it
would steer investment away from them
o Bush doing it different- something on the table for the growth companies too with the change in capital gains tax calculation
* Bush proposal innovative
o Harder for others to pick at
* Goal is to get 10-20% growth in the market
o Risks
* 3-6 weeks away from war in Iraq
* Already set the stage for higher prices of oil
* Good news though is that price could fall quick dramatically
* Might lead to increased production of oil
* Problem- uncertainty when war starts
o How long will it take?
o Also, Saudi Arabia on verge of revolution
o Risk of Iraq chemical warfare
o Outlook
* 3-6 week war
* Decisive American victory
* Huge drop in oil prices
* Global recession
* Germany
o Recession
o High labor costs
o Restrictive labor rules
o Not able to bring in new leaders in government in last election o Zero growth o Companies planning to move production out of the area o Represents about 1/3 of Europe economy
* Japan
o Long stagnation
o Resource allocation issues
o Little structural reform
o Eyes on who will be new governor of central bank
* Might be more expansionary
o Yen might collapse
o Could lead to an export boom
o Still speculative whether this would ever happen
* China
o High growth rate- 6-7%
o Foreign direct investment
* America is number one
o Also strong Chinese investment
o 85 billion trade surplus with the US
* South American
o Argentina a mess- 12% drop in GDP
* Also a political mess
o Brazil
* New left wing president
* Has been responsible
* But due to perceptions, had to raise rates to very high level- like 25% o US Trade
* US growth of 3% very good in a low growth world
* Concerns that growth in trade deficit could lead to weak dollars unless
matched by investments
* Combined with war, pressure on dollar could be worse
* OK in short term because it could help exports
* Longer term pressure on interest rates
o Summary
* Very good last year in light of events
Q&A
* What is outlook for interest rates?
o Mount- 50 basis point rise by later in year
o Hale- same rise, but might take longer
* Also, Greenspan is sensitive to deflation
* Does not want to get blamed for George Jr losing as he did for George Sr
* Questions about taxes- much of benefits proposed help a small group o Counter- most of taxes are paid by a small group people o 2004/2005- democratic congress- different agenda- Social Security taxes o Also lower end of economy not feeling as bad as they did during past
recessions
o Could get back to full employment economy by 2004 to 2005
* Then will see more benefit at lower end of economy
* Question about amount of debt
o Not so concerned since does not see a housing market bubble
* US not landlocked, so less likely to get into a bubble
o Refinancing boom went to reduce debt servicing costs
o Also, hard to have a debt problem when interest rates are only 1% o Have never had a year where housing prices plunged
* Been stagnant overall, but never plunged
* Have had some regional bubbles
o Corporations borrowed a lot of money to buy stock to shore up the stock
options
* Now coming to an end with dip in stock market
* Part of Bush incentives on dividends is to reduce incentives for the
borrowing to buy stock
* Why haven?t productivity gains led to higher profits
o Still going through enormous inventory drain from higher levels
* Losses on past production
o Earnings on current production has gone up quite a bit
* Rebounded from low of 2001
* Getting back to where it was in 94-95
* Year over year gain now over 10%
o Also, 2002 was a year to make profits look as bad as possible
* Were not getting punished as much as in prior years
o Overall prices have fallen some
* Once stabilized, profits will rise due to productivity gains
* What about state budgets and deficits
o Will result in tax increases or reduced spending at state level o Will dilute some of the federal incentives o Losses of revenues
* California- used to get 15% from capital gains- Silicon Valley- that is no longer there
o Will see fed deficit of $350 million
* Demographics- baby boomers getting older
o May be delayed- bad stock market keeps some from retiring
o Will be a number of years before boomers are net sellers
o Will be baby boomer generations from other countries that will provide
stimulus
* Housing market
o Problem will be a full years from now, strong economy and rates rise o Short term, should still follow the economy
* Technology
o What will be the next pop to stimulate the economy
o Still have not really figured out how to make networks work effectively for companies
o Companies starting to build some wish lists
o Does not see the rush to get euphoric
o Does see an opportunity to use technology to improve it better o All kinds of technology being developed that could enhance productivity o Just not a clear player yet that will emerge as a leader o Positive is that rising corporate profits will provide more corporate
spending
o Venture capital market more stingy- fallout from 1999 over spending
"Better to have 10 friends than 100 rubles." Russian Proverb
Jon F. Paul
Founder
Finance Leaders Association
1271 Grove Ct.
Lake Forest, IL 60045
www.financeleaders.org
jpaul@mba1980.hbs.edu |
