Aside from an actual recession, the next worst thing is the anticipation of one.
Economists are treading lightly. With American markets a stone’s throw from July’s all time highs and economic fundamentals holding tight, only a few analysts are picking up and moving to recession street.
Those analysts appear to be employed by Wall Street big boy J.P. Morgan, the only major firm forecasting two consecutive quarters when the U.S. economy will contract, the indication of an official recession, citing an upcoming credit crunch and fresh shiploads of turmoil from foreign economies.
But Morgan is the minority. Tempered by the market’s shakes and shudders in the 15 months since Asia’s breakdown, investors, both personal and commercial, are taking a breather. For a few weeks at least, they’re waiting and seeing.
Investor hesitation, said Edward Lotterman, an economist with the Minneapolis Federal Reserve, is one of the things that’s keeping the markets relatively calm.
“There’s an economic theory that says markets are efficient in that they make the best judgements on the values of companies,” said Lotterman. “But when a lot of information is pouring in, financial markets seem to suffer from an information overload and there can be a lot of volatility while it sorts out what’s important and what’s not.”
The information flow isn’t going to lighten up in the next few months either. Central bankers and portfolio managers, the world’s economic strong-arms, have their briefcases stuffed with news regarding the recent replenishment of $14.5 billion in IMF funds, Brazil’s plans for stabilization, and the Jan. 1, 1999, arrival of Europe’s single currency, the euro. There’s also a handful of other concerns including, not least of all, fourth quarter corporate earnings and the impact of holiday spending.
Given Lotterman’s theory about information overload, markets should be swinging all over the place. Yet for several reasons, they’re not.
“People are looking at the right things,” said V. V. Chari, University economics professor and department chair. Instead of getting worked up about international concerns, we’re looking more at the domestic market, where we should be, he said.
“If the U.S. was more exposed to foreign trade,” the damage resonating from foreign problems would be much worse, said Chari.
Latin America accounts for one-third of the U.S. export market, a percentage that is dwarfed by trade with Mexico and Canada. And Russia, even at its economic worst, can make only a minor impression on the world scene. Its GDP is relatively small at $400 billion, and its entire stock market capitalization is less than that of Coca-Cola.
“We have enough evidence now to know that events abroad have effects, but not dire ones,” Chari said.
If Brazil’s economy falters, Chari will have another opportunity to test his evidence.
Though Brazil’s prospects are looking better by the day, if it does fall, and with it knock down the whole of Latin America, U.S. businesses — banks especially — would get stung. But the real hurricane would come if American consumers get spooked by yet another foreign failure and start curtailing spending and selling off their portfolios.
Money is gushing into the American market; $1.7 billion in money-market assets were transferred into equities last week and retail spending has continued to push skyward at an annualized rate of 4 percent.
It’s more than numbers that are bolstering investor confidence, said University economics professor Jan Werner. Forgetting the actual economic effects of the two interest rate cuts this fall, September’s World Banking Conference in New York and the new IMF funds are telling people that their government and businesses are taking joint steps to patch things up.
Still, Werner, like the rest of the world is cautious in his optimism: “It’s too good to be true.”