Emory University economy-watchers don’t see many storm clouds on the horizon, but remain pessimistic about the chances of a strong recovery in the coming year.
“It’s not clear where the growth on the demand side is going to lead us out of the recession,” said Paul Irvine, professor of finance at Emory University’s Goizueta Business School. He ticked off three reasons: Consumers are unlikely to spend more than they are now; exports are unlikely to grow, given the state of the world economy; and business, which is still recovering from their capital spending binge of the late 90s, is unlikely to make much of an investment in capital spending anytime soon. Nor is Irvine sure which sector will lead the recovery, though he did say that he was investing in some financial and energy stocks.
Still, Irvine, like many of his colleagues, remains “conservatively optimistic” about the market, and foresees a U-shaped – as opposed to a V-shaped – recovery in the coming year, meaning that he anticipates that the economy will begin expanding again gradually, rather than accelerate sharply.
One reason for the guarded optimism many Emory professors have about the economy is that two important costs – energy and capital – are at historic lows and are likely to remain so for the coming year. Gas prices fell 12 percent last year and diesel prices an even sharper 19.5 percent, according to the Department of Labor. At the same time, the Federal Reserve has pushed interest rates down to their lowest levels in 40 years, 1.75 for the federal funds target rate.
Ujjayant Chakravorty, a professor of economics who follows energy, said that mild weather this winter, declining travel in the fall, and weak industrial demand are all likely to keep energy costs lower through 2002.
T. Clifton Green, a professor of finance at Goizueta, believes that the 11 short-term interest rate cuts the Federal Reserve made last year have already had an effect, softening what might have been a much tougher downturn. Ironically, however, he believes that this moderating effect may dampen prospects for a dramatic recovery as well.
“…[U]sually when things are a little starker in a downturn, when the upturn happens it’s a little more glowing,” Green said. “The people have been saving their money, setting things aside, because they’re worried about the future, and then when things get better they go out and start making the big purchases and the economy kind of booms.”
The downside risk of the rate cuts, contends Nicholas Valerio III, a professor of finance at Goizueta, is that if the economy does not start rolling again, that tool can no longer be used, and the economy could end up in a “liquidity trap” of the kind from which the Japanese economy now suffers, where no one is buying or investing although interest rates have sunk to zero.
Green did not think such a scenario was likely. “The thing that’s hugely different from Japan is the consumer,” he said. “There, consumers don’t buy anything – and we don’t seem to have that problem,” he quipped.
While Valerio does not think that we’ve heard the last of economic bad news, he did offer one positive personal anecdote. Every year, he organizes a trip to New York to introduce Goizueta MBA students to Wall Street. Last fall, he had a hard time getting firms to commit to student visits, but now, he said, firms are suddenly scheduling interviews for summer positions – which he read as an indication that they believe things may be getting better.
Past recessions have usually left some kind of lasting impression on the public. No one who lived through the energy-induced recessions of the 70s ever thought of energy in the same way. In the 80s and 90s, millions of layoffs may have led to a new social contract between employer and employee. The lesson this time around? Green predicts a new realism about the stock market.
“Hopefully that kind of irrational exuberance that Greenspan was talking about is gone a little bit,” he said, and people are becoming more realistic about the stock market. “Maybe that’s an end of innocence of sorts that’s a good thing.”
Corporations may also be becoming a little more down to earth, according to Andrea Hershatter, a lecturer in organization and management and assistant dean and director of Goizueta’s BBA program. Hershatter said she believes the downturn is leading many managers to take a more back-to-the basics approach to management. “The 90s was a whole decade of fads,” she said. Today, fad-driven, one-size-fits-all dogmas, such as zero-defect tolerance or the “need for speed” are out. In their place, she said, people are looking for time-tested approaches, tailored more carefully for a given industry. “Now they’re saying, well, if you’re in the semi-conductor business, speed rules, but if you’re in the brand management business, speed is your enemy,” she added.
Chakravorty said that although he expects energy prices to remain low in 2002, decisions made this year are likely to have a significant effect on the price of energy for years to come. Congress will decide whether to approve the Bush Administration’s plan to encourage the construction of up to 1300 new electric power plants, including some nuclear power plants, and to open up new areas to oil drilling in Alaska and off the Florida coast. That would be likely to increase the supply of energy and reduce the cost.
At the same time, Chakravorty predicts that President Bush will come under increasing political pressure from Europe to compromise on the Kyoto accord, an international agreement intended to reduce the output of pollutants believed responsible for global warming that he has rejected. A compromise would have some impact on long-term energy costs, according to Chakravorty.
One energy issue that should not be a matter of economic concern is Enron, Chakravorty said. The aftermath of the company’s collapse may end up being “a huge political circus,” he said, but it should not have any lasting macroeconomic effect.
Of course, as a number of analysts have pointed out, the only thing we can know for sure about the future is that our predictions about it will be wrong. Even the country’s very best economic forecasters’ look through a glass darkly – very darkly. Daniel Rodriguez, a professor of organization and management, cautions against putting too much stock in economic predictions. Rodriguez recently reviewed the outcome of GDP predictions made by a group of 54 top economists polled in July by the Wall Street Journal and found that 88 percent were off by more than a full percentage point – and 51 percent were off by more than 2 percent. “That’s huge,” Rodriguez said. “GDP averages about 3 percent. If you’re two percentage points off, that means you’re significantly off the mark.”
For this reason, Rodriguez said that he is skeptical of the quick turnaround many experts now predict. “The same group of forecasters that failed to predict this year’s recession are the same group predicting a fairly rapid turnaround,” he said.
“The problem is that a comprehensive forecasting model, although built on several key relationships, must be constantly modified to account for the many dramatic changes in these relationships and new variables that become more important than previously,” he explained.
“The truth is, nobody has a clue,” Hershatter said. “This year, the difference is we all know we don’t have a clue.”