Stanley Kubrick’s 1969 science fiction film, 2001: A Space Odyssey, was about mankind’s journey through the unknown in search of knowledge. It’s not unlike the voyage we take every year in search of economic indicators that will tell us what we can expect in the next 12 months. HAL the computer and the human crew of the 2001 spaceship were discovering just how big their world really was, but in the real 2001, we are continually discovering just how small our world really is.
Trouble thousands of miles away in the Middle East can affect your trip to the local gas station and your vacation plans. Thanks to the Internet, a baseless rumor can take a company’s stock on a wild roller coaster ride, and one-thirtieth of one percent of the vote in a state 2,000 miles away can affect the course of this country for the next four years. Here are some of the key indicators I see affecting our economy for the coming year:
The election and the presidency. Americans are fundamentally happy with the way things are, and they don’t want anything to change. This historic election was a clear message to the government to keep things going exactly as they have been. Both candidates were centrist; our choice was that of only moderately more liberal or moderately more conservative.
From 1994 to 1998, President Clinton was more of a Republican in his economic policy than a Democrat. The economy has been great, but higher gasoline prices raised the “misery index” (the combination of inflation rate and unemployment rates), which hurt Gore. Some statistics from the national economic picture show that American consumers were spending at unprecedented levels-while saving less and less. In 1992, the savings rate was 9%. Last August, the rate was a negative .4%, the lowest it’s been since the Commerce Dept. began tracking this data in 1959. People are worried that the good times won’t last. But [as of third-quarter 2000] they hadn’t cut back on their spending, even though we saw falling stock prices, rising fuel costs, and declining corporate profits. (Actually, this is more accurately described as higher volatility among companies in their performance-some great, some really challenged.)
We also see lagging retail sales, predictions of higher food bills, and a weaker Euro. Oil prices have tripled since 1998-the price of diesel fuel has been hovering around $2 a gallon, almost double last year’s average.
From the U.S. Labor Department’s third-quarter 2000 figures, this is what the Fed is watching in terms of price increases and wage increases versus profitability:
Inflation pressures rose, but we’re still on pace to come in at around 5% productivity for the year. For two decades, from 1973 to 1995, productivity was just over 1%.
The GDPalso slowed sharply to an annual rate of 2.7% in the third quarter, less than half the 5.6% pace in the previous quarter.
The Federal Reserve boosted interest rates six times since June 1999 to slow the economy and keep inflation under control.
Monetary policy in the short term may have been hostile to restrain inflation, but over the long term it has been a source of stimulus for continued growth and has contributed to an unprecedented period of economic prosperity.
The stock market. In the middle of the fourth quarter of 2000, the Dow Jones Industrial Average was down 12.2%. The Standard & Poors 500 was off 7.8%. The NASDAQ composite had plummeted 22%. Apple Computer’s stock lost 52% of its value in one day. Microsoft was trading at 52.5% below its high, Cisco was 29% from its high, Intel was 46% and Dell 56% below their highs. I think investors have to accept that the days of making money by investing in a company with no earnings and no prospects of ever making money are over, and we’re really seeing a return to basics-valuation and diversification.
For example, Sycamore Systems is a maker of optical switches. As of February 2000, it had never made a nickel of profit, yet its market capitalization was roughly that of General Motors. Today, things have changed. Sycamore actually showed a little profit in the first three quarters of 2000, but its market cap had fallen to about half of General Motors (16.8B/31B) although its price-to-earnings ratio of 603.41 was just a tad higher than GM’s 6.18. But despite this volatility, the world hasn’t ended. It’s not 1929 again, there is still strength in the economy, and there is money and liquidity out there.
What does all this really mean? Unemployment is very low-in fact, we are redefining full employment. Inflation is very low, savings are down below nil, the markets are off this year, but there’s been no disaster with the 40% decrease in the NASDAQ since its high earlier this year.
We in banking always talk about consolidation in our industry. But it’s much broader than that. I predict we will see continued consolidation and volatility in most industries, including health care, financial services, telecommunications, automakers, and airlines. The only place you don’t see consolidation is in the government.
Those industries that are doing well right now-and should continue to do so-are those that are staying current in technology and anticipating the demands and buying patterns of their customers. Others are falling behind, and we saw more of this in First Union’s loan portfolios. But there is still a lot of money out there. There is a lot of cash and a lot of debt. Anyone who wants a job can get a job; it just may not be the right job. As layoffs occur in larger corporations, people are finding jobs in small and medium-size industries. Others are retiring earlier and simply having fun.
The bottom line is that the soft landing we hoped for the economy has been achieved, but not without some rocky roads, and we anticipate this trend to continue for the next 12 to 18 months.