Jack Welch attempts a response to a question puzzling economists and governments alike
Just recently, we were walking down Lexington Avenue in New York when a young man in a suit stopped us. He told us that he works on Wall Street and asked whether we might answer an urgent question for him on the spot. We agreed to try, but he immediately stumped us.
"When are things going to get better?" he wanted to know. "Sometime in 2010," was our answer. "Maybe."
Can you blame us for hedging? The current recession has government experts and renowned economists alike reeling; that is, when they're not disagreeing with one another. There's no cogent consensus about what's ahead. Some people see glimmers of hope, others dungeons of doom, and still others every scenario in between.
The best we can offer is a list of the things we think we know for sure about the economy right now, and, perhaps as importantly, what we know we don't know at all.
Let's start with the five phenomena that seem fairly certain to us. First, it appears the economy has hit some kind of bottom. Our conclusion is based on order levels at every business we're associated with through private equity and consulting, as well as what we've been hearing as we travel around the US speaking to companies of every kind. We've been told that following a steady decline from May 2008 through January 2009, orders received in February, March and the first half of April were about equal to, or even slightly better than, January's levels. This good news, so to speak, is tempered by the fact that capital equipment orders continue to decline. But overall, we feel confident (OK, somewhat confident) about stating that the economy has reached its nadir.
Second, we think we know that should there be a meaningful upturn in demand, the economy will respond. Why? Because inventory reductions have been at such levels over the past nine months that any kind of surge in orders will reverberate throughout the supply chain—and pronto.
Another thing we think we know—and perhaps the most important item on this list—is that the American banking system is stabilising. Yes, there is persistent criticism of the government's emergency care: the Troubled Asset Relief Program (TARP), the Term Asset-Backed Securities Loan Facility (TALF), commercial paper backing, and so on. But there can be no doubt that credit is starting to flow again, both from banks and from the many critical non-bank lending institutions.
Another thing we know: the American populace is generally feeling better, as reflected by the recent jump in the Consumer Confidence Index. The change is not totally surprising, really, what with the surge in refinancing, the lower mortgage rates and the tax refunds. However, the vast majority of correspondence we receive is still rife with fear over job losses, and that emotion will probably persist for some time if national unemployment levels reach the double-digits, as is widely expected.
Which brings us our final "sure thing"—and one that's quite alarming. President Barack Obama's budget is based on an assumed 4 per cent GDP growth from 2010 through 2013. This is simply not realistic. During the increasingly leveraged euphoria of the 80s and 90s, GDP growth averaged closer to 3 per cent. These days, with larger deficits, deleveraging prevalent, and consumers becoming increasing frugal, GDP growth is more likely to be closer to 2 per cent. The outcome? Not reduced government spending, we'd wager, but higher taxes and more federal debt.
Now for what we don't know. For starters, we have no clue when it comes to the question on everyone's mind right now: the future direction of the Dow. One day we think, "All that government money pouring into the economy has got to work, at least short-term." And the next, "Holy cow, those looming deficits are going cause a huge crash down the road." No wonder we've become such cowards, sticking our own investments mainly into treasuries and high-grade corporate bonds. We've just never been more puzzled by the stock market.
Finally, we don't know when the economy is going to turn around. Even if it has hit bottom, it could stay here for a while. As we told our friend in the street, we believe something good will happen in 2010, but we can't promise that with 100 per cent certainty. Indeed, given the circumstances, the only guaranteed thing these days is that a large measure of uncertainty is now a fact of life.
Posted 22 April 2009 : Director.co.uk
