Alan Blinder: economy has hit bottom - WSJ.com.
I hope Mr. Blinder is correct in his assessment of the economy but I remain skeptical. While I think the economy may be improving from a statistical perspective, I don't think consumer and corporate sentiment is improving in step with the data. As he notes, unemployment is lagging other data and is likely to continue to lag. However, that's a key point. The bottom line is consumers won't begin to consume again, meaningfully, until they're confident they're personal employment is secure or, if they're currently unemployed, until they have jobs again.
As I've noted elsewhere, I believe corporate capital spending will be a key driver in true economic and financial markets recovery in the developed markets, particularly, the U.S. As companies reduce inventories (hit zero as Blinder comments), and wring out all of the cost savings which have contributed to the great 2Q earnings so far, they will be in a position to reinvest in capital stock - physical and human. As companies begin to make these investments and hire to meet their expectations of expansion, we'll begin to see a true return of consumer confidence and economic and financial markets recovery.
I believe the 2Q earnings are being driven mostly by effective cost management and not by top line growth. Cost management can only succeed to a point so there are diminishing returns to cost reduction. At some point, the companies must begin to grow their top line again. When market participants become convinced that earnings growth is being driven by top-line growth (this will happen before we actually see it in results), we'll have the foundation for a real equity market recovery.
My expectation continues to be that we won't see improvements in capital spending, consumer confidence and top line growth until 2010. Further, if cost management gains run out before we see these improvements, we could have an ugly spell in the markets as prices adjust to new expectations. Thus, as I've said before, it's always good to remain skeptical and hedge your downside risk.
I hope Mr. Blinder is correct in his assessment of the economy but I remain skeptical. While I think the economy may be improving from a statistical perspective, I don't think consumer and corporate sentiment is improving in step with the data. As he notes, unemployment is lagging other data and is likely to continue to lag. However, that's a key point. The bottom line is consumers won't begin to consume again, meaningfully, until they're confident they're personal employment is secure or, if they're currently unemployed, until they have jobs again.
As I've noted elsewhere, I believe corporate capital spending will be a key driver in true economic and financial markets recovery in the developed markets, particularly, the U.S. As companies reduce inventories (hit zero as Blinder comments), and wring out all of the cost savings which have contributed to the great 2Q earnings so far, they will be in a position to reinvest in capital stock - physical and human. As companies begin to make these investments and hire to meet their expectations of expansion, we'll begin to see a true return of consumer confidence and economic and financial markets recovery.
I believe the 2Q earnings are being driven mostly by effective cost management and not by top line growth. Cost management can only succeed to a point so there are diminishing returns to cost reduction. At some point, the companies must begin to grow their top line again. When market participants become convinced that earnings growth is being driven by top-line growth (this will happen before we actually see it in results), we'll have the foundation for a real equity market recovery.
My expectation continues to be that we won't see improvements in capital spending, consumer confidence and top line growth until 2010. Further, if cost management gains run out before we see these improvements, we could have an ugly spell in the markets as prices adjust to new expectations. Thus, as I've said before, it's always good to remain skeptical and hedge your downside risk.
