Outlook for the Economy in 2003

I. How is My Crystal Ball This Year? I lucked out. My 2002 predictions were right on the money.

II. The Past Year

        A. NBER reported March 2001 start to current recession

        B. The NBER, dating business cycles and double dips

- As ever, forecasts work well when current trends continue, they work poorly to predict turning pts. (When you most want accuracy)

             - Longest recession since WW2 16 mon.

             - Average = 11 mo.

             - This means turn around next Feb, but no later than mid summer

             -But average recession before WW2 21 months - such figures only hold until they dont

        C. Some signs of recovery

                - Employment - bottomed out?

- Industrial Production - looks like a turnaround but will it last?

                - Wholesale/Retail Sales - looks good but can it last?

                - Personal Income - harder to see but maybe a                        bottom

        D. Upshot

III. Current Policy Stance

        A. Alan Greenspan has gone almost as far as he can go

                - The scope for further cuts

                - The example of Japan

        B. Fiscal Policy

                - Deficit grows again - As much from revenue shortfall as from expenditure increases

                - What they say vs. what they do - Lip service to balanced budget but they are spending money anyway on war with iraq

III. What the Doctor Ordered and What Our Economy Needs

        A. Bumping Along in a Rut - Consumers can’t binge much more than they have with unemployment rising and interest rates as low as they will get. Consumer confidence at 7 yr. low. business investment still working off overinvestment of last 5 years - only small inventory invest. to look for

        B. The Case for a Stimulus

                - Keynesian medicine for a Keynesian situation

        This is prime candidate for some stimulus. Demand is faltering - Govt should spend money where it will make immediate impact -

- Many state govts. in a very bad state - NY a good ex. of this. - will be cutting many programs and jobs - immediate impact

                - What macroeconomics says about the kind of stimulus we need - long run vs. short run considerations

Should be temporary

Should be targeted at where it will be spent and have large mult. effects

Exs. extend unemployment bens

            give money to states so they don’t cut too much

            rebate on payroll taxes

        C. The Prospect that We Will Get a Stimulus

                - Alan Greenspan is done  - not much room below 1 1/4

                - Will Congress and the President Act?

                         The end of gridlock!

Now they have both houses and can do what they want

                         Consensus on ................

Cutting taxes in 10 years - that wont help very much - in fact it hurts if long run prospect is for large financing needs for gargantuan deficits

NOT doing anything for corporate accountability - continued lack of faith in stox

                         I thought Herbert Hoover was dead 

Obsession with balanced budget gets in our way. we need some TEMPORARY Deficity spending NOW

III. Opinions from Where I Sit

        A. Growth - Vulnerability to a shock e.g. oil shock - Continuing problem of high consumer debt - Housing boom about done and now vulnerable to downturn - Business investment will not recover sharply if consumers arent spending and their confidence figures dont look promising

        B. Inflation

                CPI - long cycles, short cycles - in the short run there's little inflationary pressure except for oil prices - in the long run huge deficits (especially if we wage a war without paying for it) can raise the incentive to engage in inflationary finance

                Stocks - P/E ratios still high by historical standards - you need to believe they are permanently higher to believe in sustained bull market

                Housing Prices

- r is as low as its getting

- after mkt. crash of 87 prices rose for 3        yrs and then crashed too

 went down for next 5 yrs in CA - 10 yrs in HI

   - tokyo property prices peaked 1 yr after mkt crashed in 89

What happens if housing market crashes? - big big problems - this has been sector that sustained spending since end of 2000

            wealth effects of housing crash more widely spread than stock mkt crash

            houses as ATM’s

            if fannie mae or freddy mac got into trouble, the bailout would make s & l look like chump change - they have four trillion in assets

        C. Interest Rates - If we do have continued stagnation, look for them to go down (as much as 1 1/4 %!!!) otherwise they are bottomed out

        D. The Rest of the World

12 years ago our trough was out of synch with the other major economies so they helped pull us up but this time there is not much help here - listing of recent releases about THEIR leading indicators

“UK index declines for third time in four months”

“Japan leading index declines”

“Leading INdex for France declines”

“Germany leading index sees fourth consecutive decline”