Ralph
09.01.2001, 22:31
The Politics of 'Recession'
By Marc Chandler
Special to TheStreet.com
1/9/01 3:22 PM ET
Pessimism rules Wall Street. And why wouldn't it? The S&P 500 index registered its first down year in six years, and the once-loved technology sector has gotten slammed. With merger and acquisition activity slowing to a crawl in the fourth quarter, investment banks recognize that their juicy underwriting revenue will likely slump.
But Wall Street is not Main Street. Nor are its concerns necessarily reflective of the country's as a whole. Recall that a majority of the voters wanted Al Gore as the next president, while unofficial surveys and demographic data suggest Wall Street preferred George Bush. Lower taxes were not important to a majority of voters, but for Wall Street, tax cuts are critical. Street pundits playing up the risk of recession may be following the cues of Bush and Dick Cheney, who are using it as the thin edge of a wedge to push for large tax cuts that initially were promised when the economy was booming.
About half of American households do not own equities. Those that do, tend to own a small amount. It is not until median family income rises above $100,000 that equity holdings become significant ($10,000 or more). So the slump in the equity market is more of a concern to Wall Street than Main Street.
More Americans own homes (slightly more than two-thirds) than equities. And for most of these households, those homes are the largest asset. Property prices have held up very well as the economy has slowed, and interest rates have fallen over the past six months. The number of mortgages being refinanced is increasing, which over time will free disposable income.
But the key to the wealth effect on Main Street, however, continues to be job creation. The percentage of Americans holding jobs rose to 64.5% in December, the highest figure since June. Although distorted by poor weather, especially in the Midwest, the December jobs data were the strongest in three months. Many businesses are now reducing the number of hours employees work, rather than downsizing. The unemployment rate was steady at 4%, just a tick above the cyclical low of 3.9%. Hourly earnings rose 0.4% after a revised increase of 0.6% in November.
Therein lies the real rub: a squeeze on corporate profits. Higher input costs, like energy and labor, are cutting into corporate profitability. In addition, rapid growth over the last couple of years has led to excess capacity, which needs to be absorbed. But lower profitability is not necessarily the same thing as a recession.
In perhaps the most glaring example of the divergence between Wall Street and Main Street, one chief economist from a U.S. investment bank wrote recently in The New York Times that a recession could be a good thing because it removes the excesses of the boom. Only a Wall Street economist -- or an ivory tower academician -- would argue that a recession is beneficial. It took several years of growth for the average household to recover from the Bush recession of 1990-91. With many Wall Street economists sounding a similar alarm, no wonder consumer confidence has faltered.
When the Federal Reserve took the unusual step of reducing overnight rates by 50 basis points between meetings, it cited, among other things, tight conditions in some financial sectors. But that tightness really is the positive development. Risk is being more appropriately priced. Imprudent lenders, who may have become overexposed to some sectors, may face balance-sheet challenges, but quality names such as McLeodUSA (MCLD:Nasdaq - news - boards) and XO Communications (XOXO:Nasdaq - news - boards) were able to tap the capital markets last week. Record volume on the New York Stock Exchange and Nasdaq also speak to the liquid market conditions.
If a recession is defined as two consecutive quarters of negative growth, I strongly believe the U.S. will not experience one. It is true that manufacturing is contracting. That is evident in the National Association of Purchasing Managers' and employment data. But keep in mind that the manufacturing sector accounts for less than one-fifth of the U.S.' gross domestic product. The unusually cold winter also has dampened economic activity. But come spring, the effect of lower interest rates and lower energy prices will be felt, and recession fears will abate.
Source: TheStreet.com
************************************************************
Ralph
By Marc Chandler
Special to TheStreet.com
1/9/01 3:22 PM ET
Pessimism rules Wall Street. And why wouldn't it? The S&P 500 index registered its first down year in six years, and the once-loved technology sector has gotten slammed. With merger and acquisition activity slowing to a crawl in the fourth quarter, investment banks recognize that their juicy underwriting revenue will likely slump.
But Wall Street is not Main Street. Nor are its concerns necessarily reflective of the country's as a whole. Recall that a majority of the voters wanted Al Gore as the next president, while unofficial surveys and demographic data suggest Wall Street preferred George Bush. Lower taxes were not important to a majority of voters, but for Wall Street, tax cuts are critical. Street pundits playing up the risk of recession may be following the cues of Bush and Dick Cheney, who are using it as the thin edge of a wedge to push for large tax cuts that initially were promised when the economy was booming.
About half of American households do not own equities. Those that do, tend to own a small amount. It is not until median family income rises above $100,000 that equity holdings become significant ($10,000 or more). So the slump in the equity market is more of a concern to Wall Street than Main Street.
More Americans own homes (slightly more than two-thirds) than equities. And for most of these households, those homes are the largest asset. Property prices have held up very well as the economy has slowed, and interest rates have fallen over the past six months. The number of mortgages being refinanced is increasing, which over time will free disposable income.
But the key to the wealth effect on Main Street, however, continues to be job creation. The percentage of Americans holding jobs rose to 64.5% in December, the highest figure since June. Although distorted by poor weather, especially in the Midwest, the December jobs data were the strongest in three months. Many businesses are now reducing the number of hours employees work, rather than downsizing. The unemployment rate was steady at 4%, just a tick above the cyclical low of 3.9%. Hourly earnings rose 0.4% after a revised increase of 0.6% in November.
Therein lies the real rub: a squeeze on corporate profits. Higher input costs, like energy and labor, are cutting into corporate profitability. In addition, rapid growth over the last couple of years has led to excess capacity, which needs to be absorbed. But lower profitability is not necessarily the same thing as a recession.
In perhaps the most glaring example of the divergence between Wall Street and Main Street, one chief economist from a U.S. investment bank wrote recently in The New York Times that a recession could be a good thing because it removes the excesses of the boom. Only a Wall Street economist -- or an ivory tower academician -- would argue that a recession is beneficial. It took several years of growth for the average household to recover from the Bush recession of 1990-91. With many Wall Street economists sounding a similar alarm, no wonder consumer confidence has faltered.
When the Federal Reserve took the unusual step of reducing overnight rates by 50 basis points between meetings, it cited, among other things, tight conditions in some financial sectors. But that tightness really is the positive development. Risk is being more appropriately priced. Imprudent lenders, who may have become overexposed to some sectors, may face balance-sheet challenges, but quality names such as McLeodUSA (MCLD:Nasdaq - news - boards) and XO Communications (XOXO:Nasdaq - news - boards) were able to tap the capital markets last week. Record volume on the New York Stock Exchange and Nasdaq also speak to the liquid market conditions.
If a recession is defined as two consecutive quarters of negative growth, I strongly believe the U.S. will not experience one. It is true that manufacturing is contracting. That is evident in the National Association of Purchasing Managers' and employment data. But keep in mind that the manufacturing sector accounts for less than one-fifth of the U.S.' gross domestic product. The unusually cold winter also has dampened economic activity. But come spring, the effect of lower interest rates and lower energy prices will be felt, and recession fears will abate.
Source: TheStreet.com
************************************************************
Ralph