Confidence Is the Key to a Turnaround
Mark Zandi, chief economist, Moody's Economy.com
The difference between a typical recession and the severe downturn we are suffering through now is the loss of faith in our economy. We are panicked and, until our fears are quelled, the downturn will rage on. The best measure of investor confidence is the Dow Jones industrial average. This real-time economic report card sometimes goes up without it signifying the end of a recession, but this recession won't end until the Dow turns up and stays up. Initial claims for unemployment benefits are a window into business psyches—claims are surging as businesses struggle to survive. Consumers are also running for the proverbial bunker. Surveys of household sentiment are near all-time lows. This downturn will end only when these measures of confidence decidedly improve.
Nothing in the current data suggests that the downturn will soon end. There have been a few rays of sunshine: retailers have reported firmer sales since their disastrous Christmas, and a few very troubled big banks say that things have been going a bit better recently. But none of this will last if the economy continues to lose more than half a million jobs a month, as it has since November.
However, there are reasons to be hopeful that the downdraft will begin to abate in earnest this summer. The Federal Reserve, the Obama administration and Congress have gone way outside the box in responding to the crisis, and although they have made a few missteps, policymakers' actions will ultimately prevail. The stimulus plan is reasonably well designed and will noticeably lift the economy later this year. Obama's plan to address the foreclosure crisis will allow a couple million distressed homeowners to hold onto their homes. Unfortunately, the banking bailout hasn't gone as well. But fixing the banks is precisely what the president must do if the economy is to find its footing any time soon.
Do More for Housing
Allan Meltzer, professor at Carnegie Mellon's Tepper School of Business and a historian of the Federal Reserve
This recovery will be slow, I believe. The rate of decline has fallen, but there cannot be much improvement without ending the banking crisis.
In terms of the government's response, they are spending too much to redistribute income and too little to spur investment. Much of the stimulus program addresses old Democratic priorities that, whatever their merit, do not contribute to recovery.
The government could be doing more. One step would be to offer banks lowinterest loans if they raise half their needed capital in the markets. If they cannot raise the capital, they are insolvent and should be reorganized under existing law. They could also reduce corporate tax rates to encourage investment. The economy would also benefit if the government offered a tax credit to anyone who buys an existing house in the next two years—a broader program than the one they've passed, which offers a credit only to first-time homebuyers this year.
The Spate of Good News May Not Last
Larry Lindsey, CEO of the Lindsey Group and former governor of the Federal Reserve
The good news is that the global economy is showing some near-term signs of stabilizing. Commodity and energy prices have stopped falling and global shipments of goods appear to have bottomed. Moreover, it is likely that the short-term effect of the massive fiscal stimulus and associated actions of the Federal Reserve should produce a positive number for GDP growth in the second quarter.
Unfortunately, this rebound is likely to be short-lived. While the response of the administration and Congress has been massive in terms of quantity, the economic quality of the proposed spending has been low, with much of the spending far out in time. Near term, the president's budget projects borrowing this year of more than $2.5 trillion, or 18 percent of GDP. This demand for funds will put a tremendous strain on global capital markets and crowd out private-sector activity around the world.
Government's management of its own financial recovery efforts has also been poor, with a set of confusing and constantly changing rules and bench markets. In February Congress explicitly "grandfathered" the AIG bonuses at the request of the Obama administration. Faced with public outrage, Congress now seeks to impose confiscatory and retroactive taxes. The bonuses were a mistake, but the Congress changing the rules of the game from month to month will discourage investors, managers and regulators from making the kinds of decisions we need to get us out of our current mess.
This combination of the high quantity and low economic quality of the government's new commitments will mean that we will likely have a worse economic picture a year from now than today. Private-sector job creation will be sluggish. Prices in the government-subsidized and -controlled sectors of the economy, like education and health care, will continue rising. Meanwhile, both real wages and profit margins in the private economy will be shrinking. This means that the near-term spate of good economic news is probably just a false dawn.
There Are Reasons for Optimism
Jeremy J. Siegel, professor of finance at the Wharton School of the University of Pennsylvania
The most sensitive and useful indicator of an economic recovery is the stock market. Historically, stocks bottom between six and eight months before the economy starts growing. If the stock market low on March 9 holds, it is likely that the economy will hit bottom in the third or fourth quarter of this year. One should also watch sensitive commodity prices, such as oil and copper. These prices usually rise when traders anticipate an economic recovery.
There are definitely reasons for optimism. The Federal Reserve's timely actions have greatly calmed the credit markets, a prerequisite for any economic recovery. Last September, when Lehman went under, the Fed lost control of short-term lending rates because banks were scared to lend to each other. The all-important LIBOR, which is the basis of the interest rate on tens of trillions of dollars of loans worldwide, climbed nearly 4 percentage points above the Federal Funds rate. Today the spread is less than 1 percent. Mortgage rates have also come down to near-record-low levels. Furthermore, some of the data on economic activity has recently begun to stabilize, such as retail sales, consumer sentiment and housing. While none of these variables is remotely "robust," they are no longer spiraling downward as they had over the past six months.
Obama made two mistakes, but neither of them is fatal. The first was to send Secretary Tim Geithner in February before the press to explain a plan to fix the banks that was completely lacking in important details. The second mistake was to present a long-term economic plan that included sizable tax increases when the economy was teetering on the brink of the worst downturn since the Great Depression. It is true that all of Obama's proposals had been spelled out in his campaign speeches. Nevertheless, when consumers, rich and poor, are cutting back spending at a record clip, the thought of tax increases, even if delayed until 2011, does not generate optimism. However, on the whole I believe that Obama has done a good job in the face of extraordinarily difficult circumstances.
Get an Adviser Who's Made Payroll
Bill George, professor, Harvard Business School, and former chair and CEO of Medtronic
Although economists say that jobs are "a lagging indicator," employment data is still the most important indicator to watch for signs that the recession has bottomed. People without jobs, or those who fear they will lose their job, are not going to start spending again in this deep recession, no matter how much liquidity exists or how low interest rates are. However, unlocking the credit system so new companies can be formed and existing companies can start investing again is vital to creating new jobs.
The economy is going to get worse before it gets better, so optimists shouldn't play up stabilization until the economy finds its bottom. There are many layoffs ahead that will swell the unemployment rolls. Eventually, the massive amounts of money the government is pumping into the economy will take hold and the economy will gradually begin to turn upward again, but this won't happen until the end of 2009 at the earliest.
The Congress, much more so than the Obama administration, is guilty of playing its old games of pitting social programs against tax cuts. In this crisis, both Democrats and Republicans should set aside their fights and focus entirely on creating jobs. The Obama administration is crying out for at least one businessperson—someone who has made a payroll—to advise the president to point out the enormous difference between saving jobs and creating new ones. The White House needs to focus on the latter, because saving jobs that are no longer viable only slows the retooling required in our economy.
Direct the Stimulus at Small Business
Reid Hoffman, chairman and cofounder of LinkedIn
When it comes to watching the economy for signs of a turnaround, I'm focused on three metrics: When will companies stabilize their layoffs? When does corporate spending start increasing? And then when does investment pick up? We're able to glean some insight into this at LinkedIn. When layoffs hit, a lot of people turned to LinkedIn—when Lehman Brothers went bankrupt, we saw a 314 percent spike in activity by Lehman people. But we can also see new company creation because people post their new employment information on their profiles, which gives us a good window into entrepreneurial job creation.
As for government's role in getting the economy back on track, I'm a strong believer in borrowing to invest, not spend, and investing in things that create new products and services. Generally speaking, that's entrepreneurship and small businesses. I would've started with a lot more spending aimed at that sector of the economy. The administration is starting to track in the right direction by emphasizing the elements of the stimulus package aimed at small businesses. I would go much faster and harder on that because investing in entrepreneurship and small business is key. I hope they do that a lot more.