One on One with Lewis Alexander, Chief Economist , Citi
Wednesday, February 28, 2007
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SUSIE GHARIB: Concerns about the economy both here in the U.S. and around the world are dictating stock market direction. Joining us now with his analysis of current economic conditions, Lewis Alexander, chief economist of Citi. Lou, welcome to NIGHTLY BUSINESS REPORT.
LEWIS ALEXANDER, CHIEF ECONOMIST, CITI: Pleasure to be here.
GHARIB: As you know, you heard Ben Bernanke saying today, no material changes in the economic outlook. Alan Greenspan saying earlier this week that a recession is possible. Who is right and who is wrong about the economy?
ALEXANDER: Oh, I actually don`t think there`s that much gap between them. I would say the news we`ve gotten the last month or so has been marginally negative. But I think the Fed`s outlook had always anticipated a period of slow growth well into -- well past the middle of the next year, past the middle of this year. So I don`t think there`s actually all that much difference between them.
GHARIB: I`ve been hearing from a number of Wall Street strategists and economists that as a result of the market sell-off yesterday that businesses are going to be pulling back on capital spending, that the housing recovery is now in question. What are your views on those thoughts -- on those comments?
ALEXANDER: I think that`s an over-reaction. I think the durable goods report that we got this week was clearly a sign that businesses are going to be a little more conservative in their investment. Frankly, they`ve been very conservative all along in this recovery, and therefore, I don`t think there`s a lot of downside. On housing, what we`re seeing is an adjustment that`s going to take some time to work its way through. There`s no question that there`s an overhang of new homes for sale and we`re going to have to go through a period of very weak residential construction to get through that. But I think that`s not going to spill over more broadly into the economy, and so I think we`re going to have a normal kind of housing cycle that`s going to last through the middle of this year.
GHARIB: Thinking about housing, what is your view on these sub-prime mortgages? That seems to be the new buzzword? It`s the new item on the worry list. Are sub-prime mortgages going to spill over into the system?
ALEXANDER: There`s no question that we`ve had a lot of innovation in the mortgage financing system and credit standards eased a lot, particularly towards the end of the cycle, and we`re seeing the payback for that now. You`re seeing higher rates of delinquencies on these sub-prime mortgages and that is going to be a challenge for some mortgage issuers. But there`s an awful lot of credit out there. Interest rates are still very low. Mortgage credit is still quite available and, therefore, that`s going to limit the magnitude of the spillover on the rest of the economy.
GHARIB: The sell-off yesterday was a global event. When you look at the global economy, is it at risk?
ALEXANDER: Well, if there were a major slowdown in the U.S., there would be effects internationally. But the rest of the world looks pretty good. The most recent data we got out of Japan was quite strong. There has been a modest slowdown in China, but a very modest slowdown. Europe is actually looking a little better than we expected. If you look at the sources of domestic demand outside the United States, they look pretty solid. So I think, look, if the U.S. slows down, the world economy is going to have an issue, but I think it`s not one that looks particularly troublesome at this point. There`s been a lot of focus on China because the selling in the market started in China. Are there downside economic risks in China?
ALEXANDER: Well, the Chinese economy does have its weaknesses, but we think that those are things that are going to play out over time. They are worried about excessive levels of investment, excessive levels of liquidity, excessive reliance on exports. And they are trying to adjust to those things, but adjust to them very slowly. And so, frankly, I don`t think there`s a lot of downside risk to growth. The financial side to the China economy has its weakness as well and we got a bit of a flavor for that this week. I think that those are going to be things that are only going to come up very occasionally. I think in the near term, China is going to continue to be a source of stability in the global economy.
GHARIB: I know you`re an economist and not a market strategist, but if we could just switch gears for a moment, given what you`ve said about the economy, given that we had this big market sell-off, will we see more dramatic market sell-offs going forward or was this a one-time episode?
ALEXANDER: I think you -- we are going to see those things from time to time and there`s no question that volatility tends to sort of perpetuate itself in the short run, so I think in the next couple of weeks, you have to assume that the market is going to be somewhat more volatile. But I think the underlying fundamentals continue to be pretty strong and I think that that`s going to provide a solid foundation. Look, volatility is going to be there. The last several years have been a period of unusually low volatility. And I think the events of the last couple of days look extreme, only relative to that recent experience.
GHARIB: All right, very interesting information. Lou, thank you very much. We`ve been speaking with Lewis Alexander, chief economist of Citi.
