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| ECONOMIC DOWNTURN | |
 March 13, 2001  |
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The markets regained some ground
today, but economic news continued to be gloomy. Jim Lehrer leads a
discussion about the nagging signs of a slowing economy.
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JIM
LEHRER: The economy is our lead story tonight. The markets were back up
today, but economic news continued to be gloomy, today's example bring
a report that retail sales were lower than expected last month. We look
at what's happening now through the eyes of four regional economists:
Joel Naroff is chief economist for Commerce Bank in Cherry Hill, New Jersey;
Mark Vitner is vice president and economist at First Union Corporation
in Charlotte, North Carolina; Paul Sommers is an economist and senior
research fellow at the University of Washington, in Seattle; and Diane
Swonk is chief economist and senior vice president at Bank One Corporation
in Chicago. First let's just go around quickly to get an overview from
each of you, starting with you, Mr. Naroff. Describe the situation in
the Northeast: How is this downturn being felt in general terms?
JIM LEHRER: Sure. Mr. Sommers, the view from the West, the overview from the West. PAUL SOMMERS: Our high tech economy is slowing down significantly. Software and computers and computer parts have all slowed down in response to the lower value of the NASDAQ and slow growth or cutbacks among major customers for these companies. JIM LEHRER: And that's having a ripple effect?
JIM LEHRER: Ms. Swonk in Chicago, what does it look like in the Midwest? DIANE SWONK: Well, you know, I think downturn is a wrong word for it. It certainly is a slowdown. But I'm in the heart of where the economic malaise is supposed to be the worst. And you'd be hard pressed to find a consumer on the street that's not still spending. Putting those spending figures into context today too they came on the heels of the doubling of the pace of spending in January and so on net many people are revising up their views of GDP growth in the first quarter because consumers are actually spending more than they thought particularly on vehicles, very important to the Midwest. We've seen production decline to drain inventories. But now the automakers are talking about an increase in production in the second quarter so we're at an inflection point where we're almost going to see this weakness turn to strength as production comes back along with consumer spending. |
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| Slowdown or downturn? | |||||||||||||||||||||||||||||
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JIM LEHRER: So downturn is not in your vocabulary. DIANE SWONK: Not at all. I think a slowdown is certainly well within all of our vocabulary. But listen to what we're talking about now. A slowdown is different than a downturn. We were an economy going at 110 miles an hour a year ago. We've slowed down to 40 miles per hour. It seems like we've stopped but we're still moving slowly forward. And I think we're going to reaccelerate well above 60 miles an hour, even higher before the year is over. JIM LEHRER: Okay. Mr. Vitner, in the South, is it a slowdown? Is it a downturn? If not one of those two, what is it?
JIM LEHRER: Let's go back around again and begin with you Mr. Naroff, what is all this talk of slowdown, of downturn or whatever? What's the psychology at work here -- as you read it? JOEL NAROFF: Some of the business people have become a little bit more cautious, but in this area again we have a whole lot of situations where, for example, in commercial real estate, vacancy rates are in the single digits. It's hard to find space; in a state like Connecticut, the unemployment rate is in the 2 percent range and it's hard to find people even now. Consumers are a little cautious. Businesses are hearing that it's a major problem, but they're really not cutting back dramatically at all. I think the idea's that they're hearing more than they're seeing as I think others have commented, and that's grated a caution but it hasn't created major reaction at least at this point. JIM LEHRER: Mr. Sommers, in your part of the world, are they hearing more than they're seeing, or what's the situation? PAUL SOMMERS: I think slight caution is the right metaphor to be using here. We still have a software industry that seems to be expanding. Boeing has stabilized. That's a very, very good thing for this state. There's some trouble spots in agriculture and forest products. But those are the only places where you really see cutbacks in this state. So, overall, I think there's still a lot of strength and people are bearing up under that. JIM LEHRER: And Ms. Swonk, you said earlier that people are still buying in the Midwest, right?
JIM LEHRER: Okay. Tell us about the consumers in the South, Mr. Vitner. MARK VITNER: Well, the consumers in the South seem to be holding up very well. Home sales are close to a record level across the Southeast. The southern United States accounts for half of all the new homes that are built in the country. And this year has gotten off to a strong start. The tourism industry in Florida has been doing remarkably well. In fact, some of the problems that hit the U.S. economy actually were a benefit to Florida because when it turned real cold in the rest of the country, the economy tended to turn down but that also caused a lot of tourists to head to Florida. But I don't want to come across as saying that, you know, that there's the all-clear signal out there. We still think that the economic growth is going to be relatively sluggish throughout most of this year. It's not just an inventory problem that we're facing. There is a severe overcapacity in the high-tech sector that's going to take some time to be worked off. When we get the inventory numbers tomorrow, we get manufacturing and wholesale and retail inventories tomorrow, retail inventories will have dropped, wholesale inventories will have dropped but manufacturing inventories have increased. And they're going to continue to be a problem. So I don't know that we're going to move past this trouble in the manufacturing sector in the next couple of months. It's likely to linger through the summer. |
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| High-tech effects | |||||||||||||||||||||||||||||
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JIM LEHRER: You mentioned it earlier and we talked about it here on this program last night -- what's happening in the high- tech area. Is that having a measurable effect in your area, Mr. Vitner? MARK VITNER: Yes, it is. JIM LEHRER: You mentioned Atlanta. Is there anything beyond that?
JIM LEHRER: Ms. Swonk, yes. DIANE SWONK: I just wanted to add on the high tech side that people
don't think of the Midwest on the high tech side, but the silver lining
to the NASDAQ collapse and the misallocation of capital to the dot-com
frenzy was a fairy tale -- as Warren Buffet puts it - I think is important
because there is a silver lining. JIM LEHRER: These are traditional firms? These are not high-tech firms or dot-coms? DIANE SWONK: This was the old-line industries, exactly. JIM LEHRER: All right. DIANE SWONK: Literally the life was being sucked out of it a year ago when the NASDAQ was booming. And I think there's been -- we've also seen many old line firms who could not find tech workers finally able to find them. An irony in my own backyard is Lucent Technologies. They had a lot of layoffs there recently announced, although at the same time, they're trying to scramble to hire tech workers. In fact, seven out of ten tech workers today work in old line industries and those old line industries are still scrambling to find workers so they're being absorbed fairly quickly in this economy that continues to generate more demand for workers than actual workers. And that's a very important shock absorber that I think we have to take into account.
PAUL SOMMERS: It is indeed. The software sector in particular in this state has grown more rapidly than anything else and continues to grow while the dot-coms have shrunk. We've lost maybe 8,000 jobs among dot-coms in Washington but gained more than 10,000 in software in the same year. JIM LEHRER: Now, explain why that could be, for those of us who don't follow this sort of thing. PAUL SOMMERS: Many of the software companies are providing tools that help the dot-com types the e-commerce companies. So there is a little bit of a spillover impact there. But the others are selling main line software applications that have much broader utility than just e-commerce. And those companies led by Microsoft have continued to grow. JIM LEHRER: Microsoft is still hiring, right? PAUL SOMMERS: Microsoft is hiring but at a slower pace. This is one of the reasons you have to think of it, I think, as a slowdown, not as a recession. Microsoft grew by about 7,000 people over the last year. They've announced that they're going to hire another 2100 or so in the next 18 months; so slower but still growing. JIM LEHRER: Mr. Naroff what's high tech mean in the Northeast? JOEL NAROFF: Well, high tech has its importance here. There's no question. Diane mentioned about Lucent in New Jersey is obviously very dependent on it. JIM LEHRER: Because Lucent is headquartered in New Jersey.
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| Reacting to the stock market | |||||||||||||||||||||||||||||
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JIM LEHRER: Mr. Naroff, what about Wall Street? What effect... everybody in the news business including our program, we always report the market is up or down. Yesterday heavy thing and NASDAQ was way down. Dow Jones was way down. What's the effect on Main Street Northeast to the stock market? JOEL NAROFF: Well, obviously especially in the New York metropolitan area, Northern New Jersey, Southern Connecticut, incomes are going to be affected by that. We'll see what happens as we move through this year in terms of the ability to spend. And a lot of it is going to affect it on the larger side, the luxury types of expenditures whether high-cost vehicles or houses down at the shore or whatever may be the case. We're beginning to see a little bit of slowdown. But again I talked to real estate agents down on the New Jersey shore, and they're not seeing any sort of major cutback as far as that's concerned -- a slowdown, yeah. We expect to see it. And that's probably the biggest impact. It will affect the New Jersey, New York, Connecticut area though. JIM LEHRER: Ms. Swonk, does bad news on Wall Street affect what an average consumer would do in the Midwest?
JIM LEHRER: Mr. Vitner, would you read it the same way in terms of Wall Street in the South? MARK VITNER: I read it a little bit differently. If you look at retail sales relative to after-tax income, in the period where the stock market boomed in 1999 and early 2000, spending grew two to two-and-a-half times faster than after-tax income for a period of 18 months. And that was pretty much unprecedented in the history of this country or at least in the post war period. Now, we're seeing a little bit of a pay back. For the last six months retail sales have been growing less than after-tax income. And I think we're going to see a continued payback probably through the rest of this year. Retail sales are still growing; they're just not growing as rapidly now that the market has come off a bit. JIM LEHRER: Okay. Mr. Sommers - Yeah - let me just ask Mr. Sommers on Wall Street before we go. Yes, sir.
JIM LEHRER: All right. Yes, quickly, Ms. Swonk, you wanted to say something. DIANE SWONK: I just wanted to say that the stock market when we had all those strong spending gains, which had very low oil prices and a mortgage refinancing boom that was delivering $60 billion in cash to consumer pockets. That money is spent directly on my capital gains which has turned around. So I think a lot of factors contributed to the gains we saw in recent years. It was not purely a stock market phenomena. Let's face it, the savings rate is still falling. If it was a wealth effect, it should be rising now. JIM LEHRER: All right. I got you and our time has spent. And thank you all four very much. |
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JOEL
NAROFF: Well there's some slowdown already, but it isn't really great.
What happened in the Northeast was to a very large extent that we didn't
have any major expansion. We didn't grow excessively fast during most
of this growth recession in the '90s. As a result, we have a slowdown
but not as great. Part of that is because we are not nearly as dependent
on manufacturing. And this is largely a manufacturing recession right
now. 
PAUL
SOMMERS: Oh, very definitely. You can see that in housing starts, for
example, in this state, and just an unwillingness now of investors to
put money into new start-ups which are hanging around on the fringes
trying to get in, trying to establish some companies for the future.
MARK
VITNER: Well, it's definitely a slowdown. We're taking some lumps but
overall the South is still growing slightly faster than the nation.
We've got an unemployment rate that's averaging about 3.8 percent and
job growth is still better than 2 percent. But at the same time, the
manufacturing sector in the South, which is rather large, particularly
in non-durable goods industries, has taken a lot of hits. North Carolina
actually leads the nation in manufacturing job losses with a loss of
about 25,000 jobs over the last year. We've also seen some trouble in
the tech sector. Atlanta actually added the most high-tech jobs during
the 1990s of any city in the country. And it's seen quite a slowdown
recently and tech companies have given back about 4 million square feet
of office space back to the sublet market because they took out leases
on this space thinking they were going to need it or grow into it. Now
they're actually moving the other way. 
DIANE
SWONK: Actions speak louder than words. And I think one of the things
that's important to look at is even though overall consumer confidence
has deteriorated in recent months there's a real dichotomy which Alan
Greenspan has referred to, the difference between how people feel about
their own backyard, their own wallets and how they feel about their
expectations about the future. Their expectations about the future have
deteriorated quite sharply mostly related to negative news regarding
the economy. Their own current financial situations, thought, have held
up relatively strong. They're well within expansion territory. And it
sort of goes back to something I always live by: Never bet against a
consumer who has got money in their pocket to burn. 
MARK
VITNER: Well, the Raleigh Durham area -- I just got back from visiting
with clients up there. That's a major high-tech center. IBM has put
expansion plans on hold. Cisco is cutting back. Nortell is cutting back.
The Washington, DC area has also seen a number of lay-offs. That's the
biggest high-tech center in the country is actually the Washington,
DC area, which is basically the birthplace of the Internet. And they
are seeing a lot of cutbacks there as well. So I think it's too soon
to say we're out of the woods yet but I do think that we will see some
improvement on the consumer side before we see some improvement in the
high- tech sector. 
JIM
LEHRER: And, Mr. Sommers, you already mentioned high tech. That's a
really big deal out in your part of the world, is it not? 
JOEL
NAROFF: That's correct. And obviously that's a concern here. But it
isn't nearly as great, it doesn't have the concentrations, it has the
pockets. There's pockets in Philadelphia, pockets in New Jersey -- and
obviously up through Connecticut and especially in Massachusetts. So
it does make a difference. But I think one of the things to keep in
mind is that there is a real dark side to the productivity gains that
we've begun to see here. And that's the idea that businesses are reacting
very rapidly to the changes in the economy, the slowdown. They're reacting
all at once. And so what we're seeing is a compression of the adjustment
process now. Whether it's in high tech or it's in manufacturing, we're
seeing a long-term six, nine, 12 month compression occur in six or 12
weeks. And that makes it look like it's a lot worse than it actually
is. We're seeing it here in the Northeast, but again it's not nearly
as significant. 
DIANE
SWONK: It has more of an effect on their expectations. Half of households
have - you know-- something invested in the stock market. But the overwhelming
majority of households, the largest asset they hold is the money in
their homes. We've seen mortgage refinancings surge in recent months
actually and stay at high levels. It means they're cashing in on the
equity in their homes, rather than worrying about the equity in the
stock market at the moment. And I think that's part of the reason we've
seen spending so resilient in the face of these stock market woes. I
think unfortunately Wall Street certainly has a role in understanding
the economy, but because so much of our news is based off Wall Street,
we often get a very misperception of it about what happens to Main Street
America. To Main Street America what's more important to them is the
fact that their real wages are still intact and rising; the paychecks
they take home every other week are still rising, relative to overall
price levels. That's what's important, and that's something that hasn't
happened in 30 years with the kind of run we've had over the last several
years. And I think that's what's dominating spending right now.