Case for a V-shaped Recovery

Part of an economic outlook delivered during the 2001 Robotics Industry Forum by Don Reynolds, Consulting Economist and Futurist 

Once a year, industry leaders come to the RIA Robotics Industry Forum to learn about the state of the industry. In November 2001, more than 120 industry leaders convened for strategic networking opportunities and pertinent intelligence gathering on a wide variety of user and supplier topics. The keynote economic presentation came from Don Reynolds, president, 21st Century Forecasting.

Reynolds outlined his vision of the affects of recent events, and predicted some economic outcomes, including a 'V-shaped recovery' for the U.S. economy. He asserted an overall optimistic view in the near-term, including a resurgent economy from mid-2002 through most of the rest of the decade.

Historical View
Economic forecasts are best viewed from a historical perspective, explained Reynolds in his presentation. He went on to say the main factors that have influenced the economy, and continue to do so, are still in place. These include globalization, demographics and technology.

Global trade has tripled in the last 10 years, began Reynolds, and Europe has been preparing for a new economy based on the new Euro currency. Economies and financial markets have become more inter-dependent than ever, with trade barriers falling and stimuli in the form of the North American Trade Agreement and the World Trade Organization.

As global trade accelerated, the major demographic driver for the economy was and is the Baby Boomer set. An increase in the number of Boomers between 45 and 55 years old translates into higher wages, higher savings, higher spending and higher labor productivity.

A key element of productivity is the technology factor, which cannot be discounted despite the bursting of the tech bubble. Here Reynolds foresees a long-term trend for more innovation, new products, growth and productivity payoffs.

Variables in Socioeconomics
Of the three big variables in today's economic model (globalization, demographics and technology), Reynolds pays particular attention to the population segment in the age bracket of 46-1/2 years old.

'I overlaid the Standard & Poors Stock Index with this demographic, and found that when the numbers of people 46-1/2 years old increased, the economy expanded,' said Reynolds. 'When ranks of people that age diminished, so does the economy.'

He compared our situation to Japan, saying they went through the Baby Boom phase about 15 years ahead of us. He noted that their economy has been hit hard in the last 10 years or so, and drew a correlation to a population in Japan that has stagnated with a combination of a low birth rate and an overall older population.

It will be 2006-2008 when the 'Boomer slide' happens in the U.S., according to Reynolds.

Variables in Fiscal Management
A hot economy had everyone excited and nervous in early 2000. The NASDAQ hit 5000 in March at a time when stocks were selling based on potential sales. Then it hit: the tech stock market bubble. Around that time Gross Domestic Product was 7-8%, and Federal Reserve Chairman Alan Greenspan started raising interest rates in May, with a delayed effect of six to eight months. This was the situation as we headed into the U.S. presidential election, noted Reynolds.

'We have never had a down 4th quarter during a presidential election,' said Reynolds. 'But this was no typical election. It took 36 days to confirm the president.'
 
Reynolds' explanation of today's fiscal dynamics continued: In January 2001, he said Greenspan saw a recession coming, and started to lower interest rates. He did it again and again, trying to soften the landing. 'Then 9-11 happened.' The world and its markets became very skittish, and people stopped traveling, working and consuming in the usual manner.

'V' For Victory
Even by early November, at the time of the Robotics Industry Forum, hopeful signs of a recovery were visible. One major shift was the synchronization of fiscal and monetary policy because of the events of September 11. There was a united strategy within U.S. and world leadership for a near-term victory on the economic front, leaving experts with ammunition to predict how the recovery would take shape.

'Now economists are in a debate over the 'alphabet recovery',' said Reynolds. 'One theory is a 'U' shaped one where we go down, stay down a bit, then go up. Another theory describes an 'L' shape: things go down and stay down. Finally there is the 'V' shaped recovery. Things go down, and down further than we thought, worse than we thought, but then they go up sharply.'

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Reynolds believes this is the outlook for the U.S. He supports his belief by pointing out what is different about this recession cycle than in years past, in particular a post-'9-11' fiscal policy that combines tax cuts and interest rate reductions.

'Greenspan cut rates 10 times in as many months. There has been a first round of tax cuts, with more to come. Interest rates went down. Fuel prices went down,' said Reynolds, citing some key points of his analysis.

He went on to describe how the economic recovery package has an ultimate effect of pumping $400 billion back into the economy as a result of the government's actions, including $150 billion in savings from tax cuts, $40 billion for NY, $15 billion for the airlines, lower interest rates pumping in another $100 billion into the economy, with a like amount realized from additional defense spending and special spending, and lower energy prices, to name a few.

There is a 'multiplier effect' that eventually factors the $400 billion into over a trillion dollars in impact, continued Reynolds. 'Every time money is freed for consumer spending, it gets spent many times over. For instance, you refinance your house, get $400 a month back off the payment, then you go out and spend it.'

Most economic models predict an upturn in the second quarter of 2002, when we hit positive numbers in Gross Domestic Product, according to Reynolds. He anticipates 3.5% GDP in 2Q 2002, and 4.8% in the third quarter.

'Great, but how does that equal capital spending?' he queried. 'Right now we have excess capacity. We have to work that off before we can expect big gains in capital spending.'

Preparing for Recovery
Industry is in a relatively good position to regain momentum, in part because inventories are pretty much under control. Durable equipment that enhances productivity and quality, such as robotics, can do well again as soon as the markets return to a growth mode.

'I predict capital spending will be up by 12% in the third/fourth quarter,' said Reynolds.

He detailed his prediction for capital spending (as a percent of GDP) as follows:
Q1 2002 Cap X = (6.7)
Q2 2002 Cap X = 1.3
Q3 2002 Cap X = 9.6
Q4 2002 Cap X = 12.6

Predicting the upturn in capital spending is tricky, but now is the time to plan for that eventuality. Prepare the market for your ideas and your manufacturing solutions. It is key to the health of your company to maintain your corporate prominence through adequate marketing and product development. You want to be at top of mind next year when the economy becomes reinvigorated.

VJ Day for the Economy
A second quarter victory for the economy is in site, barring truly catastrophic events.

'Yes, (the 9-11) terrorism will have a ½% effect on the slowing economy,' said Reynolds, basically dismissing this aspect of economic uncertainty. Instead he pointed at other factors that bode well for the economy.

Among signs for a recovery cited by Reynolds:

• The Euro will hit parity with the U.S. dollar in the spring;
• China, India and Chile have major economies that are poised for integration with the global economy-'China will be O.K. because they are now part of the WTO, and Chile will be the next member of NAFTA,' predicts Reynolds;
• The European bank and London's banks cut rates ½ % point in November of 2001, foretelling a coordinated global economy;
• The Canadian dollar is gaining ground, and so on.

These are some of the factors that spell a V-shaped recovery for the U.S. economy, according to Reynolds. With a combination of demographic drivers, particularly the influential 46-1/2 year-old age group; fiscal drivers including rate cuts and tax cuts; and newly awakening world markets, industry will grow, demand will rise, and capital spending will return to meet the need for high quality, low cost goods.

In his summary, Reynolds pointed out that the consumer confidence is the pivotal factor. 'In some ways it's a matter of faith,' he said. 'It all hinges on consumer confidence, and as long as people believe in the political leadership, things will be okay.'