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To: Uncle Frank who wrote (96873)	2/10/1999 1:11:00 PM
From: Rich Young	Respond to of 176387

Looks like they missed third base on the DOW. Need to go back and touch 9100 again before we head for home. Slowly, slowly, so as not to scare anyone. Rich

To: Uncle Frank who wrote (96873)	2/10/1999 1:15:00 PM
From: Mohan Marette	Read Replies (1) \| Respond to of 176387

<Economy> U.S Growth American Style-(Courtesy Morgan Stanley Dean Witter) US: Growth American Style Feb.10,1999 Stephen Roach (New York) While it appears to be full steam ahead on the US growth front, most forecasters and investors still cling to the notion that an imminent slowdown is at hand. This has been a consistent characteristic of the consensus (and Fed) growth prognosis for each of the past three years, and has long been a central element to the outlook for 1999. For each of the past three years -- and now for 1999 -- consensus GDP growth forecasts at the start of the year have averaged 2.1%. Our own forecast has averaged about 3.2% over this four-year interval, and we have just raised our estimates for 1999 to 3.5%. What do we see that others don't? In conversations with clients, I stress five key factors that currently drive our growth optimism for the US economy, the first being an underlying macro framework that provides a built-in resilience to the emerging market currency crisis. While export-related hits are a distinct negative as activity plunges in the crisis economies, this drag on growth has been more than offset by the positive impacts traceable to lower interest rates and reduced inflation. The interest rate effects stem largely from the "safe-haven" characteristics of US bonds that attract global investors; moreover, with cheaper imports from Asia squeezing the prices of domestic substitutes, there is a related expansion of the purchasing power of American consumers and businesses. With merchandise exports accounting for 10% of GDP and the interest-rate-sensitive components of aggregate demand -- consumer durables, residential construction, and business capital spending -- having a 27% output share, the arithmetic of resilience has turned out to be a powerful antidote to crisis. Second, there is plenty more in the pipeline insofar as the interest-rate impetus to the US economy is concerned. In fact, the explosive 5.6% annualized increase in real GDP in 4Q98 had absolutely nothing to do with the Fed's 75 basis point easing of last fall. The lagged effects of those rate cuts will only begin to boost the economy in late 1999. Moreover, low interest rates provide powerful support to equity valuations, central to the ongoing wealth creation that has played an increasingly important role in supporting consumer demand. Third, corporate earnings resilience is a key prop to the US growth outlook. Recently, we raised our 1999 forecast of after-tax corporate profits growth to +3.4% (from +0.6%), broadly consistent with the above-consensus view of our equity strategists that S&P 500 operating earnings should increase by around 8% this year. Consistent overshoots in GDP growth drive the volume side of the earnings equation. At the same time, well contained labor cost pressures -- underscored by the just-reported -0.2% annualized decline in unit labor costs in 4Q98 -- defer the inevitable compression of profit margins that invariably afflict a late-cycle US economy. Earnings resilience also adds support to the equity valuation framework. But, even more importantly, well-maintained corporate profits play an important role in underpinning business capital spending. The bear case for economic growth in 1999 is critically dependent on the belief that an excessive corporate debt burden, in conjunction with a significant earnings shortfall, will finally topple a record-setting capital spending cycle. In my view, earnings resilience should alleviate many of the widely feared pressures that many see bearing down on business investment programs. Fourth, the US economy is well balanced. There are no major inventory excesses to speak of. Nor is there evidence of any serious overhangs of unused productive capacity that typically trigger the major downleg of a capital spending cycle. This latter point may seem curious for a US economy that has pushed its ratio of real capital-spending-to-GDP up to an all time high of 13%. However, inasmuch as more than 50% of all expenditures on capital equipment are now concentrated in the information technology component -- where product cycles are notoriously short -- the recent surge of "gross" investment is not inconsistent with a seemingly counter-intuitive slowdown in the net investment (gross expenditures less depreciation) that drives capacity expansion. That, in fact, has been the outcome in recent years, with growth in the manufacturing sector capital stock having slowed to around 2.5% in the 1990s, well below the longer-term historical trend of 4%. Fifth, there still seems to be an ample flow of fuel into the US growth engine in the year ahead. Growth in real disposable personal income (+3.6% y-o-y through December 1998) is running slightly above trend. The ongoing impetus from wealth creation is drawing ample support from a still well maintained stock market. And our scenario for a gradual healing in the global economy offers ample opportunity for improved external demand in the second half of this year. In short, the growth engine is likely to burn increasingly on all cylinders as the year unfolds. Of course, there's plenty that can go wrong. A pop of the equity bubble and/or another international shock are at the top of my worry list. But as the consistent growth overshoots of the past three years have indicated, there's plenty that can go right. In that regard I've never forgotten a lesson I learned as a pup. Back in the early 1970s as a fledgling economist at the Federal Reserve, I had my first encounter with the legendary Arthur Burns. When I presented what I truly thought to be a brilliant scenario for a weak economy, the Chairman puffed on his ever-present pipe and cautioned, "Son, don't ever underestimate the inherent growth potential of the US economy." I guess I've never forgotten that lesson. --------------------------------------------------------------------------------