Will Wal-Mart catch
the Wall St bug?
By Joanne Gray
Scott Laney runs a $US50 million a year heavy truck
equipment business in Portland, Oregon, that is having one
of its best years ever.
But Laney, president of Griffith Rubber Mill Inc, is one of
a growing number of manufacturers across the United
States who has put a brake on expansion because he is
unsure of where the economy is heading.
"We've cut our investment plans for next year until we get
a better feel from our key accounts," he says.
His major clients, the industrial giants Volvo and Daimler
Benz, still have very healthy order books for 1999. But
overcapacity and a slowdown in the economy could see
those orders evaporate.
"I know how easy it is for that backlog to disappear. We
don't directly export to Asia, but our customers certainly
do, and what I see in the market place now is a lot of
uncertainty."
Thousands of miles east, at Value City Furniture in
Columbus, Ohio, store manager Maurie Miller has noticed
a new caution among shoppers. "Until the month of
October, things were pretty decent. But in the last couple
of weeks, sales have kind of levelled off."
"I think that's to do with the instability before the
[November 3 mid-term Congressional] elections," Miller
says. And volatility on the stockmarket "goes hand in hand
with it".
Still, he is optimistic. "After the elections, consumers will
probably get back into gear."
Well, maybe. Only six months ago the US economy was
on a triumphant march into its eighth year of growth. That
euphoria has slowly eroded. Replacing it is fear of a credit
crunch and a slide in economic growth that the most
pessimistic say will turn into a recession. Years of surging
business investment are coming to an end, a process that
was likely even without the dampening influence of an
economic crisis offshore.
At the same time, with one eye on the roiling stockmarket,
consumers look like they may start to heed the concerns
of economic experts. For the fourth consecutive month,
consumer confidence levels have fallen and now they are
at their lowest level in two years.
In the manufacturing, agriculture and mining sectors, prices
are stagnant or falling, and it already feels like a recession
has arrived. Staff lay-offs and spending cuts are
increasingly being seen as the only way to keep profits
intact.
But the service sector, the US economic powerhouse, has
remained largely immune to the weakness in other parts of
the economy. Two quick and unexpected interest rate
cuts may have headed off a credit squeeze, calmed the
markets and shown that the Federal Reserve is
determined to stop Wall Street's malaise from becoming a
sickness that infects households across the country.
"We know that the value of wealth in the hands of a
concentrated segment of the population, call it Wall
Street, has fallen substantially," says Dr Catherine Mann,
senior fellow at the Institute for International Economics.
"The value of the portfolios being held by the people who
shop at Wal-Mart, they've fallen too, but not nearly so
dramatically. Does Wall Street's recession turn into
Wal-Mart's recession? That's really the question." Among
economists, the weight of opinion is very firmly in the
slowdown-but-no-recession camp. The consensus
forecast among 50 economic pundits surveyed in early
October (before the latest Fed rate cut) by Blue Chip
Indicators was for the economy to grow by 2.1 per cent
in 1999, from a 3.4 per cent expansion this year. Fresh
data on third-quarter growth is due out on Friday, with
expectations of a 2 per cent expansion.
Despite that latest rate cut, forecasters are already scaling
back expectations for consumption and capital spending.
Blue Chip expects the consensus forecast for 1999
growth to fall to 2 per cent by November.
Gail Fosler, an economist at the Conference Board,
remains one of the most optimistic pundits in the country.
She scoffs at talk of recession and is picking 3.5 per cent
growth in 1999.
"A recession is extremely unlikely. I've actually raised my
growth forecasts for next year," she says. "I think we are
going through a very bad patch in terms of general
psychology, and while folks are understandably nervous,
the real impact of what we are seeing is going to be more
than counter- balanced by the very low interest rates that
we see at the moment."
Admittedly, she says, financial markets were being
propped up by more leverage than was safe, and
unwinding that can be risky. "We are going through the
kind of credit rationing and risk aversion that, if the
economy is fundamentally weak, can cause recessions."
A big inventory drawdown in the second and third
quarters caused a "mini-shock" in production. "But the
real question is whether demand turns around and follows
it, and I think that is highly unlikely," she says.
There is no doubt the Fed's monetary easing has restored
some confidence, and it has assured the markets that there
is nothing lurking in the system that could require another
bailout like the hedge fund Long Term Capital
Management. Also keeping consumers happy are rising
house prices, which are as important in assessing wealth
as non-pension financial assets.
"When consumers pick themselves up and dust
themselves off, and look around and see the earthquake,
and see the buildings are still standing, then they will
simply move on with underlying fundamentals," says
Fosler.
Another believer in the blithe optimism of the US
household sector is Catherine Mann, who is predicting
that the US economy will grow between 2 and 2.5 per
cent in 1999.
Personal income is pretty strong; mortgage refinancing at
lower rates has given people more cash in their hands.
The stockmarket has not rebounded to where it was, but
it has levelled off. "That stability returns them to a feeling
of confidence even if the value of their portfolio is lower,"
says Mann. She does not see consumers choosing to save
more instead of spending.
"I'm pretty bullish, because I think the US consumer
basically likes to spend. I mean, they are not like the
Japanese – they don't hunker down much."
In the third quarter, for example, consumption spending,
which represents 70 per cent of gross domestic product,
is expected to slow to 3 per cent growth, down from an
annualised rate of 6 per cent in the first half, but still
buoyant. Another positive influence is low unemployment,
and job creation in the economy is still strong.
Yet there are a couple of economists looking at the same
fundamentals with much more jaundiced eyes. They fear
that US consumer and business spending are about to hit
the wall. The consensus view among economists is that
corporate profits this year will fall for the first time since
1989.
It is far from fashionable to predict a recession in the US.
Experts have in recent years so often failed to gauge the
resilience of the market and the strength of the economy.
But two of the most pessimistic are big banks, JP Morgan
and Chase Manhattan, which are very close to the
financial market turmoil and the ensuing credit crunch.
Jim Glassman, senior US economist at Chase Manhattan,
is forecasting 0.9 per cent growth in 1999, what could be
described as a growth recession. He is downbeat in part
because the boom in the stockmarket appears to be
coming to an end. And business investment levels, which
made sense when the economy was growing at 3 or 4 per
cent, will have to slow dramatically. That alone could trim
one percentage point off growth.
He accepts that the Fed's second rate cut showed its
determination to head off a recession and has already
buoyed spirits. "We are seeing some improvement in
sentiment: some borrowers are starting to come back into
the market, and credit spreads have narrowed a little," he
says. But the appetite for risk among lenders and investors
has fallen. Already in some regions commercial property
prices have tumbled 20 per cent and more marginal
projects are being shelved.
Rate cuts are a short-term panacea, he says, that will
cushion the impact of the overcapacity in the economy.
Businesses that do want to expand are going to find it
harder because profits are being squeezed, and external
finance is harder to find and more expensive.
JP Morgan, the commercial and investment bank, is
expecting the worst. It is forecasting a flat first quarter in
1999 and then two quarters in which the economy
shrinks, before starting to expand again at the end of the
year.
"Profits are being competed away by a lot of investment
and cheap imports," says JP Morgan economist Robert
Mellman. The prospects for corporate earnings are
gloomy and business investment is picked to fall by
between 5 and 9 per cent in 1999.
"To our mind the profit problems don't just have to do
with Asia," he says. "here is something separate going on."
The investment phase was due to come to an end, and
easy credit in the past couple of years just "kept it going
longer".
Add to that the spectre of tight money, which has not
been dispelled. Ironically, it is the medium-sized firms that
could have most trouble getting finance. Small companies
will continue to be funded by regional and community
banks that are lending as usual. But
lower-than-investment-grade borrowers – which fund
themselves from higher-yield securities, venture capitalists
and share offerings (some $US100 billion in funding each
year) – could find it tougher to get finance.
Another drag on the economy is the burgeoning current
account deficit, which is expected to reach $US250 billion
($406.5 billion) this year and $US300 billion or more in
1999. But some say imports are not running nearly as fast
as they feared because producers in Asia are still
struggling to obtain finance to fund production. JP Morgan
believes the worst impact of the trade deficit has already
been felt.
Mellman says the Fed's latest monetary policy easing and
a further 75 basis point reduction that is expected soon
"will ensure the recession is relatively short and shallow.
But it can't prevent it".
afr.com.au
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