April 9 , 2003
By almost any measure, the economy currently is stalled.
Housing slumped in February, although weather paid a large part of
that. Manufacturing activity
began to slip in February and slid even faster in March.
After paying their energy bills, consumers cut back on other spending.
To make matters worse, even the usually strong Asian
markets have begun to slow. Both
Singapore and Japan reported declining industrial production in February and
Korea's spurt is starting to stutter. Growth
in China and India still look secure, but economists were beginning to ratchet
down their 5 percent growth forecasts for that continent even before the
Severe Acute Respiratory Syndrome (SARS) hit.
What portion of that stall is war related and what part is the result of economic problems that do not end with the war are what is troubling economists. Undoubtedly, the wartime uncertainties are factors. High oil prices, also partially war related, must be considered. Bad corporate balance sheets and governance concerns, however, were there before the war and will not be solved by ending the fighting.
Actually, I have good news.
A double dip recession remains unlikely.
I was worried when oil prices approached $40 per barrel.
Clearly, some of the sluggishness in Asia is the result of purchasing
power being drained by higher energy prices.
In the United States, purchasing power adjusted for price changes
slumped from nearly 3 percent growth a year ago to almost nothing today.
Fortunately, the winter weather is leaving.
The spring increase in oil product inventories is beginning to move
ahead of expectations. Inventories
remain low. Furthermore, if
Nigeria production slumps because of a strike, Venezuela falls back into
chaos, or further shipping problems develop in the Persian Gulf, then oil
prices could soar this summer and spending could slump again.
However, so many tankers filled with oil are on the
waters that some shiploads are struggling to find purchasers.
By June, I expect that purchasing power will be growing again by more
than 1 percent per worker. That is not a boom, but it also is not recession.
Furthermore, the auto industry is providing the strongest
concessions ever to move cars. Industry
experts expect that these activities will catapult auto sales to more than 18
million units from the 16 million at annual rates that sales struggled to
achieve in the last quarter.
Winter also distorted housing activity.
Sales of new single family homes may not jump above a million again,
but they should remain high. Furthermore,
some rebound from sluggish storm delayed activity should be expected in the
next few months.
Lower oil prices and the end of the war also should
restore some luster to the Asian markets.
However, SARS will not be cured by stopping the fighting.
International travel will remain impacted.
Airlines may see as many as 25 percent fewer passengers on those
international flights, although war's end should restore parity to passenger
A more aggressive monetary policy also may begin
restoring growth to the European markets after the war.
South America's economies were beginning to recover before the recent
rise in oil prices stalled some gains. (Remember,
Venezuela, Colombia, and Mexico are significant oil producers and benefited
from the higher prices).
While the economy can limp along without growth in
corporate spending, capital spending will need to jump to get this sluggish
economy into recovery mode. The
end of war might lead to higher inventory investment.
Fear of war clearly stalled the inventory accumulation that was
developing early in the year.
However, many capital spending programs remain on hold.
To the extent that uncertainty about the future is causing the spending
delays, the end of war could mean some growth.
Nevertheless, profits will not sprout as the guns go
silent. Balance sheets actually
are deteriorating as first quarter profit projections are not being achieved
at many companies. Thus, the
bi-polar credit conditions that have confronted American business remain.
Those companies who have strong balance sheets and show
profit growth have access to whatever financing they desire at very reasonable
terms. Unfortunately, many of
their struggling corporate customers do not.
Without growth in purchases by customers, there is little reason to
invest to grow the business.
There are other reasons to invest. With such high returns from capital spending
(we just concluded one of the stronger years for productivity gains in
our history) and the cost of capital so low, cost reductions can be achieved
by spending some money for capital goods.
In the end, that cost cutting need to spend will pull the economy out of this malaise, assuming the cost of capital is allowed to remain low.