A ‘Stealth’ Recovery on the Horizon?
Stealth fighters have been used in the skies over Baghdad. Back home, economist Lynn Reaser thinks she has spotted something else: a “stealth” recovery.
Although the job numbers issued by the Labor Department on Friday were gloomy and consumer confidence continues to be downbeat, Reaser, the chief economist of Bank of America’s capital management division, has noticed positive indicators coming in under the radar. Among them: Corporate balance sheets generally are in good shape because companies have reduced debt.
She also foresees an uptick in consumer sentiment inspired by “the strength and competence” of the country’s armed forces. And consumers will have the money to go with their recovered confidence, since Americans’ disposable income has increased 5% a year for the last three years.
There’s a good case to be made that assuming the war goes quickly, economic recovery is on the horizon.
Business investment has been missing in action for the last two years, as companies used the vast amounts of high-tech computer gear and software they had splurged to buy in the late-’90s boom -- but felt no need to purchase any more.
Investment in what the Commerce Department terms “information processing equipment and software” -- the single most important category of business spending at almost $1 trillion a year -- has fallen nearly 5% a year since 2000. That decline, after growth of 15% per annum in the late ‘90s, has left significant sectors of the economy gasping for air.
But the pause also has created pent-up demand as technology has marched on. The world wants more complex chips and computers and software to control supply chains or to power wireless phones and pocket computers.
“We see increasing demand” for such products, says Michael Sadler, vice president of sales for Micron Technology, a Boise, Idaho-based maker of memory chips.
At Oracle Corp., a leading supplier of the large software programs with which corporations run their operations, the feeling is that the war is a major reason customers are reluctant to spend.
“If the uncertainty of this war goes away, that would be helpful to capital spending intentions” of Oracle’s customers, Jeffrey Henley, the firm’s chief financial officer, told investment analysts last month.
“I think people are still cautious,” he added, “but they indicate they would start initiating new projects.”
One example is the Oracle-built computerized system that Southwest Airlines implemented last year to help passengers make reservations more quickly, thus helping offset delays caused by increased security inspections at airports.
Information technology products, in short, are essential systems that keep the U.S. economy humming. And a pick-up in orders will have a powerful ripple effect, adding productivity to industry and speed and convenience to consumer services.
One thing that could help awaken business spending is President Bush’s tax-cut plan. Indeed, says economist Edward Yardeni of Prudential Securities, the chief benefit of eliminating taxation of stock dividends -- as Bush has proposed -- is that doing so would “lower the cost of capital for corporations and encourage business investment.”
The Senate didn’t buy that argument: Last month, it cut the controversial dividends measure, reducing the Bush tax-cut package to $350 billion. Senators were worried about swelling budget deficits.
But Bush is determined to use a victory in Iraq as leverage to get his whole $725-billion package, including the purge of the tax on dividends. If the war ends soon and the aftermath is orderly, he could go back to the Senate with the kind of political clout the chamber can’t ignore.
That would mean Bush would succeed where his father failed after the 1991 Persian Gulf War. The country was in recession then and remained so when the war ended in quick victory. The White House failed to act to boost business investment and consumer confidence, letting economic forces take their course. And that course was downward. Unemployment climbed from 6.6% in 1991 to 7.3% in 1992 -- when the elder Bush lost his reelection bid.
To be sure, if his son succeeds in getting all he wants from Congress, the federal red ink will pile up. After a while, that would lead to higher interest rates -- as years of deficits did in the early-’90s administration of the first President Bush.
But deficits do provide short-term stimulus, as the government spends on everything from food stamps to tanks. The world would welcome that spur in the United States, because it is virtually the only engine for the global economy. Most European countries, particularly Germany, are in or near recession. Japan’s giant economy remains moribund.
“A strong U.S. recovery is
the main hope for the world economy today,” Robert Hormats, vice chairman of Goldman Sachs International, told investment experts at the Milken Institute’s Global Conference in Beverly Hills last week.
Given the basic strengths of the U.S. economy, that is never a vain hope. And if the war in Iraq can be ended quickly and well, it could well become a hope fulfilled.
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James Flanigan can be reached at jim.flanigan@ latimes.com.
