July 20, 2003


Richard Berner of Morgan Stanley sounds very bullish on the American economy:

Morgan Stanley: ...There are encouraging signs for our recovery call.  Consumer demand is improving, and with relatively lean inventories, production has begun to play catch-up.  As a result, some improvement in growth from the tepid 1.5% pace of the past nine months seems to be in train.  Make no mistake, however; it is too soon to proclaim an acceleration to 4%-plus growth.  That's still only a forecast, and key risks remain.  Among them: Labor markets are still soft, as companies are reluctant to hire.  Global growth is weak, and there is no obvious non-U.S. engine of growth.  And energy prices are still high, with crude quotes well over $30/bbl and gasoline prices edging back up in July.  Even these risks, however, may be abating.  Are the signs of recovery sustainable? And will the evidence of peaking risks continue?  Yes, in both cases, in my view.  Here's why.

First, let's quickly review the analytics.  Five factors lie behind our call for stronger growth: Post-bubble headwinds are fading; for example, in the ratio of capital spending to depreciation, I see some signs of building pent-up demand (see "Higher Rates Will Accompany -- Not Kill -- Recovery," Global Economic Forum, July 13, 2003).  Lower energy prices are a second factor, already evident in the 0.7% annualized decline in "headline" inflation as measured by the CPI over the past three months, acting like a tax cut for consumers and businesses.  Third, financial conditions are in my view highly accommodative and are still a factor strongly supportive of growth.  The jump in longer-term yields and the backup in the dollar are symptoms of recovery, not factors undermining it.  In contrast to the stability of stock prices over the past month, credit availability has improved and risk spreads have tightened.  Fourth, new fiscal stimulus is only now hitting paychecks.

Finally, reduced uncertainty -- most recently evident in CEO surveys from the Conference Board and the Business Roundtable -- hints that planning horizons are lengthening.  For example, while a smaller percentage of CEOs responding to the Roundtable survey expect to increase their capital spending over the next six months compared with the April results, a much smaller group expects to cut outlays.  As a result, a diffusion index of CEOs' capital spending plans rose to 51 in July from 45.5 in April.  That's progress, but still not enough.

Nonetheless, incoming data do show a quickening in the pace of economic activity.  Both forward-looking "soft" data and harder evidence of current spending suggest that demand is either stable or accelerating.  Manufacturing orders may be ending their slump: June results from purchasing managers brightened from May, and the 11-point July bounce in bookings in the Philadelphia Fed's Business Outlook Survey is also encouraging.  The Morgan Stanley Business Conditions Index, derived from a canvass of our industry analysts, has registered three straight months of improvement, with several analysts reporting significantly higher July bookings  (see "Introducing the Morgan Stanley Business Conditions Index," Investment Perspectives, July 17, 2003).  That's good, but more is needed.

Hard data are more mixed, but in my view they will soon follow the advance indicators...

Posted by DeLong at July 20, 2003 02:08 PM | TrackBack


Stocks may go up for a while. But the deficit spending lunch is not free and must be paid for. Obviously the Admin thought we would be $12/barrel oil. If they hadn't totally alienated the Iraqis, it could have happened that way.

It will take a year or two before the magnitude of these deficits sinks in. This year's could easily run to $700B (not including Social Security. BushCo.is simply not telling us about large categories of costs.

Posted by: Charles on July 20, 2003 04:31 PM

Anyone know if it's possible to get employment statistics for Mumbai (india) online?

Posted by: Jon H on July 20, 2003 05:24 PM

As Bush prepares to criss-cross the Nation with his see my tax cuts are working

And mail some new checks out by way of Milton Friedman.
You are going to have to do better then this.
Will stoop to any trick to win their way.

You should really go down the hall and out the door and across the campus and sit in on one of these classes.

Posted by: Bruce Ferguson on July 20, 2003 07:54 PM

Prediction: There either is something wrong with the dataflow, or it will soon show an amazing turnaround.

What I just saw on a trip from Seattle to Modesto via I-5, with a return trip by plane from San Jose to SeaTac airport, is not consistent with economic doldrums: Heavy truck-trailer traffic going both north and south, crowded airplanes, busy restaurants, rush hour traffic jams, construction activity all over....

My business just broke its sales record for May by 40%, and I'm approaching the record for June before the month is half over. My suppliers are similarly busy and I may not be able to fill all the orders I'm getting.

Then again, maybe I'm the anti-Joe Btfsplk.

Posted by: Patrick R. Sullivan on June 12, 2003 04:17 PM

Posted by: Patrick R. Sullivan on July 21, 2003 07:30 AM

Patrick R. Sullivan has a point somewhere in quoting himself, but I don't see it.

We still ain't seeing any data turnaround. Just more of the mixed to poor stuff we've been seeing for months. Difference primarily being how its being spun.

Posted by: Padraig S. Taliban on July 21, 2003 07:46 AM

Richard Berner has been singing the same song for 3 years. Hopefully, Berner is correct. The odds are perhaps with him. But, he has been repeatedly wrong. In any event, I bet with the Fed last Fall and am becoming increasingly conservative now. Gains have been terrific, but the market is most expensive.

Posted by: bill on July 21, 2003 08:27 AM

The problem is not strength and well-being of American corporations, rather the well-being of the American worker. China is the recipient of substantial out-placements in manufacturing from America, while India is making significant progress in competing in domestic American technology services. Also, India is gaining investment in out-placement in manufacturing. There is a substantial movement of automobile parts manufacturing to India. Where is the American demand for labor to come from?

Posted by: anne on July 21, 2003 10:00 AM

Not sure if it's been Richard Berner every time, but comments from Morgan Stanley seem to alternate between Stephen Roach saying everything's going horribly wrong and really actually OK. I suppose it lets them hedge their bets, but they're also starting to look kind of schizophrenic...

Posted by: Duncan on July 21, 2003 10:37 AM

The market isn't that expensive, Bill. By postwar historical standards, it's normal.

The problem is that there's a risk it won't go anywhere for a number of years, until the deficit problems get sorted out. Every year that it doesn't go anywhere is a disincentive to investment, which creates an invirtuous circle. Investors who can't afford to hold for 20, 30, 100 years may look to other investments or to other markets.

Posted by: Charles on July 21, 2003 10:38 AM


The market is absurdly expensive by post war standards, unless you mean post war in Iraq standards. The p/e of the S&P was 32 a week ago, and NASDAQ p/e was about 200. No problem, the market was this expensive in 2000. Yes, it really was. I suggest you be willing to take profits!

Posted by: bill on July 21, 2003 10:49 AM

Agreed. Unless I can no longer count, or we are counting on 20% quarterly profit growth for the coming 2 years, this stock market is very very expensive. Even then....

Posted by: dahl on July 21, 2003 11:11 AM

Notice also: The interest rate on the 10 year treasury has risen from 3.11% on June 13 to 4.13% today.

Posted by: bill on July 21, 2003 11:33 AM

"Patrick R. Sullivan has a point somewhere in quoting himself, but I don't see it."

-Posted by: Padraig S. Taliban on July 21, 2003 07:46 AM

After quoting Coulter, it's a logical next step.

Posted by: Barry on July 21, 2003 12:38 PM

We too are having a superb business year, but I can not generalize this to the broad economy. The data and anecdotes tell me that there is no sign of strengthening in the labor market, and that could easily result in slow GDP growth for another 2 quarters.

Posted by: bill on July 21, 2003 01:06 PM

"Patrick R. Sullivan has a point somewhere in quoting himself, but I don't see it."

-Posted by: Padraig S. Taliban on July 21, 2003 07:46 AM

After quoting Coulter, it's a logical next step.

Posted by Barry at July 21, 2003 12:38 PM

Since the lady has been vindicated on the Stalin invitation by none other than Clark Clifford (and several others), I'd say my batting average is excellent.

Posted by: Patrick R. Sullivan on July 21, 2003 01:46 PM

The stock market is undoubtedly very expensive, but that isn't the point. The steepening of the yield curve means one of two things: 1) the bond market is suddenly more optimistic about the economy; 2) it isn't more optimistic about the economy but it is concerned about a reasonable increase in inflation (I consider a return to stagflation extremely improbable), which means we have successfully avoided a lapse into deflation. Both of these are unmitigatedly good signs.

Posted by: JT on July 21, 2003 02:44 PM

"both" should be "either."

Posted by: JT on July 21, 2003 02:45 PM

You mean that Coulter actually said one thing that wasn't false? Wow. Well, I guess if she just kept typing, she had to, sooner or later.

Posted by: Barry on July 21, 2003 06:50 PM

" You mean that Coulter actually said one thing that wasn't false? Wow. Well, I guess if she just kept typing, she had to, sooner or later."

Can you name one substantive thing she's written that is false?

Posted by: Patrick R. Sullivan on July 22, 2003 06:59 AM

"The jump in longer-term yields and the backup in the dollar are symptoms of recovery, not factors undermining it."

Mr. Berner may feel that they are signs of a recovery but I don't believe many economists would argue that they are stimulative.

Posted by: Stan on July 22, 2003 11:55 AM
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