 everal
parts of the U.S. and world economy are already recovering, while
others are still sinking. The global recession developed piece-by-piece
over the last two years, and the recovery will build gradually, as
well.
A serial recovery
makes sense, given the debt and price shocks that are still rippling
through the economy in response to the dollar’s massive strength
in the late 1990s. In some sectors, prices adjusted downward early
(for example, commodity-related sectors, technology, and then manufacturing).
In each of these areas, much of the excess debt and overcapacity
may have already been identified and rationalized, allowing a sequential
recovery there.
However, where
prices are sticky or have only recently fallen, debt problems will
still be discovered and corporate-earnings expectations will have
to be reduced from current levels as the downward pressure on prices
becomes apparent.
Keep in mind
that this recession is of a different character from previous ones.
The expansion of the late 1990s was built on dollar strength, low
inflation, heavy investment, and very strong corporate-earnings
growth. The strength in consumption in the 1990s reflected the growth
in personal income and jobs in the economy — not a wealth effect.
As a result, this recovery looks like it will be characterized by
a lack of corporate-pricing power, continued debt and credit problems,
weak consumption, very low inflation, and much weaker nominal GDP
growth than historical norms.
One of the
sticky areas (resistant to price declines) of the U.S. economy has
been personal income. It held up unusually well into the recession,
and has only recently begun weakening. Where the U.S. consumer was
resilient leading into the recession, consumption
will lag in the recovery. This will temper the expected inventory-rebuilding
process.
Another sticky
area of the U.S. economy has been housing. Square footage per person
has reached record levels, and prices stayed remarkably strong into
the recession. Note the sharp decline in November’s median price
for new houses, and expect residential investment to be one of the
weak spots in the recovery.
As for corporate
earnings, they are measured in nominal terms. Given the poor outlook
for world nominal dollar GDP, corporate earnings will be relatively
weak in 2002. Using this measure in 1997 and 2000, one could anticipate
weak corporate earnings growth in 1998 and 2001, respectively.
The net result
— as
I've said before — is a bowl-shaped recovery, not a V.
We'll climb out of this the same way we climed into it: piece by
piece.
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