August 18, 2003

By Contrast, Morgan Stanley Is More Than Bullish...

By contrast, Morgan Stanley is more than bullish on America. It is positively aurochish on the likely rate of economic growth in the current quarter. Let me give the mike to Richard Berner:

Morgan Stanley: ...There's no mistaking the gathering momentum in U.S. economic activity, however.  Incoming data depict a rapidly accelerating economy: From just 1.4% in Q1, it now appears that growth could touch 5% in the current quarter.  And the strength is broadly-based, suggesting genuine staying power.  Upside surprises in both consumer and business capital spending have paced the improvement in demand.  Responding to tax cuts and the ongoing benefits from lower debt service costs, consumers stepped up spending sufficiently on vehicles and a variety of soft and hard goods in July so that even modest gains in August and September would likely yield a 4½% real pace in the third quarter.  Fuelled by rising profitability, a broad-based replacement cycle, and stepped-up tax incentives for investment, businesses appear to be committing to increased capital spending.  While third-quarter data aren't yet available, sharp June gains in shipments and, more important, in advance bookings, hint at real gains in the high single digits...

A 5% annual real GDP growth rate in the third quarter relative to the second. Yet it is hard to see hours worked in the third quarter being higher than in the second. That suggests that we are in another 5% annual growth rate productivity quarter.

Posted by DeLong at August 18, 2003 10:47 AM | TrackBack


Morgan's street pushers may be bullish, but check out what their chief economist Stephen Roach has to say. It's far from bullish to say the least. You can read his comments at the Morgan Stanley website.

Posted by: mcp on August 18, 2003 11:19 AM

The Wall Street Journal's front-page story today agrees that 5% growth in Q3 looks like it may happen after the strong manufacturing and retail sales reports combine with the lagged effects of mortgage refinancings and tax rebate checks. The bigger question is whether such growth is sustainable into the new year"

"When the adrenaline rush of lower interest rates and big tax cuts ebbs, will the expansion have gained enough momentum to continue? Or will it fade, as earlier, stimulus-stoked expansions did in 2002 and again earlier this year?

"Recent evidence favors a positive outcome, yet the many obstacles facing this recovery make predictions difficult. And if growth does fade, watch out: Economic policy makers already have used up much of their monetary and fiscal ammunition."

Given the uncertainty, Morgan Stanley probably shoud be a bit more cautious in its outlook.

Posted by: Dimmy Karras on August 18, 2003 11:36 AM

Richard Berner of Morgan Stanley is aware that there is still no sign of labor market strengthening. Productivity growth is easily running over 3%, so there may be no employment gains for several months even from 5% GDP growth.

My hope is a strong growth this quarter can be sustained, my guess is that is can not be sustained because a limited employment gains. Employment lags a recovery, but this recovery began 21 months ago, and there has never been such an employment lag.

Posted by: anne on August 18, 2003 12:00 PM

High productivity growth in sectors like "exhaust system changing" (auto aftermarket), but the usually slow productivity growth in sectors like "diaper changing" (human care).

This would - in a frictionless world - make us decrease worked hours with autos and increase hours worked in human care.

In our real friction-laden world it is of course hard to make diaper changers out of exhaust system changers. So we have unemployment, faltering demand, and in the end also a risk of fewer hours worked even in human care.

Posted by: Mats on August 18, 2003 12:27 PM

Non-substantive, digressive comment:

What the heck does "aurochish" mean? I looked in three web dictionaries with no luck.

We now return to scheduled programming...

Posted by: Jim Harris on August 18, 2003 12:27 PM

Auroch is a prehistoric kind (maybe even ancestor) of bull. Big. Somewhere I had read that iberian toros are quite direct descendents, but still not as bigs.


Posted by: Antoni Jaume on August 18, 2003 12:48 PM

Think Auroch and Mooo or Snorttt. The ice bull cometh. Waiting for Auroch. Oops.

Posted by: anne on August 18, 2003 01:00 PM

Thank you, Antoni. I found it. Pronounced "ow-rocks", for those as puzzled as me.

Time will tell if I ever hear the word again.

Posted by: Jim Harris on August 18, 2003 01:03 PM


Have you no faith in tax cuts? Humph.

Posted by: anne on August 18, 2003 01:05 PM

OK. I have been goaded into a substantive comment:

The telling sign will be capital investment expenditures, not employment, during the next six-seven weeks. So far, we have signs of aurochish life in technology sectors, signs of distress elsewhere, with a sort of flat net for the investment aggregate. This has to change into a modest plus at least, before we are off and running. Maybe modest won't be enough, if construction sags on interest rates.

Hey, that word aurochish again; habit forming I guess.

Posted by: Jim Harris on August 18, 2003 01:23 PM

All subject to Berner's reservations further down the page:

"...Yet more lasting challenges to sustainable growth remain. At the top of my list is the fact that, so far, the recovery remains jobless. Business frugality when it comes to hiring has yielded a 4.3% gain in labor productivity over the past year and a half-the strongest early-recovery performance in forty years. That's been good news for both profits and real wages, helping to promote capital spending and to sustain consumer incomes, but it's unsustainable. Without follow-through from improving labor markets, the current surge in consumer spending would soon wither as consumers became increasingly cautious. I fully expect labor markets to improve as the acceleration gathers pace and businesspeople gain confidence in its staying power. So far, however, the evidence is so far limited to a modest decline in jobless claims over the past four weeks.

The second challenge comes from surging bond yields that threaten to choke off interest-sensitive consumer and business demand. I strongly believe that the forces promoting recovery will swamp that challenge. Indeed, evidence that the economy is accelerating has been one factor lifting yields in time-honored, cyclical fashion. But this time both an apparent change in the Fed's thoughts about the need for 'unconventional’ monetary policy measures, and the well-documented dynamics of mortgage-related hedging activity have also contributed significantly to the backup. The fear among investors is that the mortgage-related selling isn't over, and the interplay with further signs of strong growth will quickly ratchet yields up past 5%.

While that level is a threshold that would cause me concern for the economy, it's noteworthy that in other respects financial conditions are still highly accommodative. Credit availability improved again over the past three months, as the Fed's latest Survey of Senior Loan Officers indicates that banks recently virtually stopped tightening business lending standards, lowered spreads on C&I loans for the first time, on net, since 1998, and some have begun to ease standards on consumer loans. Stock prices have maintained high levels, and even the dollar's recent 3% trade-weighted appreciation pales by comparison to its long slide over the past eighteen months. Most important, the major impact on the economy of the earlier easing in financial conditions has just begun to appear.

The stubbornly high level of energy prices is a third challenge to a strong recovery. Despite the recent declines in natural gas prices to below $5/mcf, the elevated level of crude quotes at over $30/bbl and the resulting rise in gasoline prices (ten cents per gallon over the past six weeks) represents a modest loss of discretionary consumer purchasing power. As my colleague Eric Chaney notes in an accompanying Forum, we're revising up or projected path for crude oil prices over the next year, reflecting stronger global demand and lingering supply restraints (see "Waiting for Iraq, Discounting the 'Missing Barrels' in today’s Global Economic Forum.) While Brent crude prices in the $27/bbl range likely would trim t most only 0.2% from economic growth, compared with the prognosis associated with a decline to $24.50/bbl, worsening energy supply issues would offer bigger hurdles for U.S. and global growth in coming months.

Last, but certainly not least, while signs of improving global growth are emerging, they are modest in scope and the global growth backdrop remains relatively weak. While the worst may be over for some European and Japanese manufacturers, and some forward-looking indicators are encouraging, the improvement is modest. While Asia is rebounding from the milder-than-feared impact of the SARS epidemic, slower growth in Canada and Latin America likely will continue to impose a modest drag on U.S. growth until early next year.

The upshot is that while the recovery story seems to be playing out according to script, it's important to recognize the major hurdles to a vigorous and sustained rebound. I'll be breathing easier when job growth resumes, bond yields and energy prices stop rising, and more signs of a global economic upswing emerge."

Posted by: Pooh on August 18, 2003 02:04 PM

Yeah, mcp, Pooh is also sticking with the Roach scenario. It wouldn't be the first time over the last couple of years when Roach has been right on the money and Berner has been utterly out to lunch.

Where is Roach though? He's been gone for over a week.

In fact, his disappearance can be traced to just about the time our host got really quite excited about the economy. Maybe, just maybe, Brad DeLong's eloquent pronouncements that the age of miracles has not passed was the straw that finally broke the camel's back. After all, Roach has often complained about the terrible stresses associated with being a solitary bear in a world full of bulls.

Or maybe Roach is just on vacation.

Posted by: Pooh on August 18, 2003 02:21 PM

"Employment lags a recovery, but this recovery began 21 months ago, and there has never been such an employment lag."

That's not the central question. Has there ever been such dramatic gains in productivity? The loss of a job is virtually always a bad thing for the impacted individual, but this is not the case when we are discussing macroeconomics.

People losing their jobs can often be a good thing for the overall society . Those &^%)# scum bag gods of creative destruction are downright mean and ornery. Did somebody promise you a rose garden? Well, if they did---they lied to you. And there’s little a Bush, Clinton, or Bozo the Clown administration can do about it.!

Posted by: David Thomson on August 18, 2003 03:24 PM


Maybe he's been sent into exile with Doug Cliggot. It's not nice to speak poorly of stock prospects when you work for the Wall Street machine.

Posted by: mcp on August 18, 2003 04:58 PM

Anyone who treats these pronouncements as anything more than advertisement can buy shares in the Brooklyn Bridge. Just send the check to ole bakho. Merrill Lynch is pushing bond funds or at least a balanced portfolio. Therein lies the difference.

Posted by: bakho on August 18, 2003 10:28 PM

Did anyone see Brad on Monday's Nightly Business Report on PBS? There he was large as life... Nice to be able to picture him finally!

Posted by: VJ on August 19, 2003 02:13 AM

"That's not the central question. Has there ever been such dramatic gains in productivity? The loss of a job is virtually always a bad thing for the impacted individual, but this is not the case when we are discussing macroeconomics."

But that's a sign of "bad productivity." Pooh's hero, Stephen Roach, on good and bad productivity:

"It has become conventional wisdom to blame this jobless recovery on America’s stunning productivity performance. I think that vastly oversimplifies a very complex issue. First of all, there is no empirical evidence of a consistent trade-off between productivity growth and job creation in the US economy. There are several examples of high-productivity recoveries that have been accompanied by rapid employment growth. That was the case in the 1960s, when both productivity and employment rose at about a 3% average annual rate over the 1962-68 interval. It was also the case in the latter half of the 1990s, when trend productivity of 2.3% was accompanied by 2.6% average annual employment growth. Yet there are also several examples of low-productivity recoveries that were accompanied by rapid growth in hiring; the low-productivity rebounds of the late 1970s and the 1980s both come to mind, when trend productivity growth was closer to 1% but job growth was maintained in the 3-4% range. The current experience of unrelenting headcount reductions in the face of persistently rapid productivity growth is a real outlier in the annals of the post-World War II US economy.

That may well reflect a dark side to America’s productivity bonanza, one that I have worried about for a long time (see my November 1996 article in the Harvard Business Review, “The Hollow Ring of the Productivity Revival”). It all boils down to the essence of productivity enhancement -- whether efficiency gains are driven by synergies between human capital and technological innovation or by hard-nosed cost-cutting. The former is “good productivity” -- the stuff of rising prosperity and lasting improvements in a nation’s standard of living. The latter is “bad productivity” -- centered on strategies of downsizing that have the clear potential to lead to increasingly hollow enterprises and labor markets.

I must confess to being worried once again that the pendulum is swinging from good to bad productivity in the United States. Facing stiff competition and lacking in pricing leverage, the imperatives of cost cutting have never seemed more acute. Courtesy of newfound IT-induced efficiencies and increasingly aggressive outsourcing strategies, Corporate America has been highly successful in getting more out of less. As a result, rapid productivity growth has now become a double-edged sword. The good news is that it sets the stage for improved profitability and persistent low inflation. The bad news is that it is an inhibitor of job creation, thereby denying the US economy the self-generating fuel of wage income growth that normally puts cyclical recoveries on a more sustainable path.

Nor are there any signs that US businesses are about to entertain a serious rethinking of hiring policies. That’s certainly the verdict of the Manpower survey of employment intentions, where the tally for 3Q03 showed nationwide hiring expectations falling to their lowest level in 12 years. The same can be said for the latest Challenger survey of publicly announced layoffs -- a 43% sequential surge to 85,000 affected workers in July. Lacking in job creation and the income generation typically forthcoming from improved labor market conditions, the saving-short, overly indebted American consumer is looking more and more vulnerable."

Posted by: Pooh on August 19, 2003 03:24 AM

For one..many many bonus points for the word "Aurochish". Should we just rename you Brad Rushdie?

Secondly..I just took this as an advertisement as well. M-S are not exactly..umm...independant. To be blunt, I do not trust stockbroker predictions on anything. Conflict of interest and all that.

Finally, if no jobs come back, frankly the GDP can grow by double digits, it won't change a thing. There are serious society-wide implications to joblessness. Unless something changes that, frankly I give America 10 years. 20 at most.

Posted by: Karmakin on August 19, 2003 06:24 AM
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