Economy Turning Around?
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RAY SUAREZ: This week brought mixed news for the U.S. economy. For the first time since August 2002, the Dow Jones Industrial Average closed above the 9,000 mark. But today’s labor report showed unemployment continuing to rise to its highest level since 1994. Here to discuss what all this means are Abby Joseph Cohen, chair of the Investment Policy Committee at Goldman Sachs, an investment banking firm.
And Allen Sinai, chief global economist and president of Decision Economics, an economic and financial market advisory firm. Well, the Dow is up 15 percent since the beginning of 2003. Briefly today the S&P was trading over a thousand. Allen Sinai, what is driving these gains in the market?
ALLEN SINAI: Well, we have a stock market that’s looking ahead, and justifiably so, to a better economy; not now but late this year and 2004 the economy will be better, earnings will be better, interest rates are going to stay low. The administration is working hard for peace and prosperity. This is a early stage of a classic equity bull market that we are seeing develop.
RAY SUAREZ: Abby Joseph Cohen, do you agree? And if there are fundamentals that are pushing this, what is happening in the wider economy to make those investors feel that next year might be a better year?
ABBY JOSEPH COHEN: I agree to a very large degree. We are seeing the beginnings of an economic recovery. And while the economic data are quite mixed, there are signs that things are beginning to get better.
In addition, we’ve had a very significant upward movement in share prices over the last few weeks, in large part because there was a sigh of relief. Prior to the military engagement in Iraq, there was a great deal of discussion about how bad things could be — $70 per barrel oil, $3 at the gas pump and so on. Fortunately, none of those ugly scenarios, including the recession scenario, seem very likely right now, and stock prices have responded accordingly.
RAY SUAREZ: Well, during the run-up to the war in Iraq, and during the war itself, investors were told that that was one of the things putting a damper on the rise in prices. Does the war being, at least the most active part of the war being out of the way, did that build into this rise in the indexes?
ABBY JOSEPH COHEN: Clearly it has been a factor in terms of the sigh of relief in stock prices. But perhaps the most important reaction is yet to come. Keep in mind that just the way investors were avoiding risk, so, too, were people who run businesses. And while they were avoiding risk, they were not buying inventory, not doing capital spending, and most importantly, they have not been hiring new workers.
What we’re hoping, in the months to come, is that those labor reports will start to get somewhat better. But let’s keep in mind that usually the labor markets are among the last piece of the economy to recover.
RAY SUAREZ: Allen Sinai, I’m sorry, you were trying to get in?
ALLEN SINAI: I was just saying that the end of the war and the toning down of the crisis, along with some promise on the Middle East to the clear intent of the administration to get geopolitical risk down, that is, I think, reducing the risk premium in the stock market leading to higher P.E. ratios and helping valuations.
It’s very important that when you have a difficult and disturbing international environment, that’s a risk around the economy and equity market. It showed up in the drive down in equity prices in the second half of last year and early this year. And it is now somewhat reversing in helping the equity market move higher.
RAY SUAREZ: When we talk about the market indexes and what they’re showing us, how far out are they predicting? You mentioned next year the economy being better. Is that the rule of thumb, about a year?
ALLEN SINAI: I think so. I think the here and now to these numbers, which, by the way show us that we have a terrible labor market. It’s really an ugly labor market; it’s still deteriorating. The U.S. economy in the second quarter is not going to grow very much, but that doesn’t affect the equity market which is six, nine months ahead and looks toward the next upturn and wherever equity prices go, they tend to go through a correction when the reality of the upturn occurs.
But right now we are in a very buoyant early, it’s classic – we’ve seen this, and I think Abby will agree with me, again and again in business cycles for decades, this kind of move.
RAY SUAREZ: Well Abby Joseph Cohen, if the markets look forward, the numbers look back. What were the numbers telling us about economic activity over the last month and the last quarter?
ABBY JOSEPH COHEN: The numbers were very mixed in that report today. What we found out, for example, is that the number of hours worked cumulatively in the economy didn’t grow very much at all, which means that the second quarter has been fairly sluggish.
However, let’s keep in mind the following: we have been seeing a rise in the number of temporary workers. Those businesspeople, who are not yet willing to commit to hiring new workers, are willing to bring on temporary workers when they see the demand for their businesses picking up. So that is one glimmer of hope.
But I think it’s important to keep in mind the following: Businesspeople have been much more reluctant to move forward than have consumers. For the last several quarters, consumers have been going about their business consuming, and we have seen that businesses have not yet responded. We believe that business confidence, rather than consumer confidence, will really drive the economy however it goes in the next several months. We think business confidence will become increasingly restored.
First, the accounting problems are now largely behind us. Number two, the worries over Iraq are now largely behind us and number three, businesspeople know that central banks, not just the Fed, but increasingly the European central bank are now firmly behind doing what they can to stimulate economic activity. We should be more concerned, by the way, about the pace of economic growth outside the United States than inside. Japan and Europe, the world’s second and third largest economies, are looking much more lackluster than is ours.
RAY SUAREZ: But, Abby Cohen, you just mentioned the consumer was doing his and her part. If people are spending money and interest rates are low and demand for a lot of things has remained reasonably good, how is it that people are losing their jobs? Why is the job market so slack?
ABBY JOSEPH COHEN: Allen referred before to the normal pattern of an economic cycle. Typically we come out of recession when consumers buy new homes, buy new jobs. And then months later, we begin to see that businesspeople feel better, they rebuild inventories and that’s when they begin to hire new workers. We have not yet reached that phase and that is what we are hoping will be developing over the next few months.
RAY SUAREZ: Allen Sinai, your diagnosis of the job market and what the latest numbers tell us?
ALLEN SINAI: Oh, it is really how corporations run their businesses these days. We’ve all become so productive, those of us who have jobs, that the economy can move ahead with fewer workers. We see that in manufacturing, in every report. And I think unfortunately, it is going to be the way of the world.
The rest of this year we won’t see much jobs growth, yet we’ll see the economy on average do better and the stock market will do, I think, is doing quite well. We just won’t see much in the way of new jobs. We’re so productive that it turns out to be counterproductive in terms of jobs growth, at least at this stage. And this is going to be continuing, I think, jobless expansion.
RAY SUAREZ: The number of companies announcing planned layoffs have decreased and the number of layoffs they’re announcing have decreased. What does that say about their expectations?
ALLEN SINAI: Well, they’re — go ahead, Abby.
ABBY JOSEPH COHEN: I think it says something very positive in the form of the absence of a negative. It means that businesspeople are no longer scurrying the way they were to reduce costs, and we see that many companies on a company by company basis are now looking at ways to increase their business rather than to reduce costs. That’s good news, and it means we go from an economy that is just beginning to recover, ultimately, to an economy that is truly expanding. And that’s what we can all look forward to.
RAY SUAREZ: Abby Joseph Cohen, Allen Sinai, thank you both.