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US economy not a cause for optimism

NY TIMES NEWS SERVICE, NEW YORK
Monday, Feb 04, 2002, Page 19

Foreign economists and executives are much less optimistic than their American counterparts about what is ahead for the US economy.

That divide showed up starkly and repeatedly in wall-to-wall conversations at the World Economic Forum, whose cast of more than 2,000 prominent people has been meeting since Thursday behind layers of security at the Waldorf-Astoria. While the US focuses on the economy's strengths, particularly the persistent consumer spending, the other delegates dwell on dwindling profits, mounting debt and the constant shrinking of corporate operations.

"What we have is an ordinary recession made worse by bursted bubbles, and the shakeout will last longer than the Americans seem to realize," said Kenneth Clarke, a Conservative member of Britain's Parliament and a former chancellor of the exchequer.

The disagreement is more than academic. Not only the US, but Europe, most of Asia and much of Latin America are caught in the first worldwide recession since the 1970s. In panel sessions and interviews, virtually everyone agreed that only the US has the economic heft to lift the others out of recession.

Unrealistic expectations

But economists, executives and government officials from abroad said Americans were unrealistically optimistic about how soon this would happen.

"It is not going to happen this year," said Klaus Zimmermann, president of the German Institute for Economic Research in Berlin. "A lot was invested in high-tech equipment for the new economy and that has to be used up before investment picks up and the American economy with it."

A turnaround is not yet visible in economic data. Corporate spending on offices, factories and equipment continued to fall in the fourth quarter, the Commerce Department reported last Wednesday.

This cutback caused the recession and now the question is when growth will resume. While American forecasters optimistically spy the resumption of corporate spending, the companies themselves continue to shed workers and facilities, prodded to do so because they find themselves capable of producing more than they can sell.

Excess capacity played a role in the decision of Kmart, the nation's third-largest discount retailer, for example, to file for bankruptcy late last month, in preparation for dozens of store closings and thousands of layoffs.

Still, the persistent optimism is understandable, several of the visiting foreigners suggested.

"It is the collective aspiration of what Americans want to have happen, particularly after Sept. 11, and maybe it will somehow be self-fulfilling," said Baba Kalyani, chairman of Bharat Forge Limited, an Indian manufacturer of truck parts, whose sales are down, particularly its exports to the US. "But I do not think the rebound will come very soon."

Stock prices worry Guillermo Ortiz, governor of Mexico's central bank. "American investors have been holding up stock prices in expectation of rising profits," Ortiz said. "Who knows if that will materialize. If it does not, you could have a pretty negative market reaction in midyear."

Europeans are particularly outspoken. "A lot of Europeans view American optimism as part of the character of the country and not necessarily reasoned analysis," said Peter Sutherland, the Irish chairman of Goldman Sachs International and a former top executive at BP, the British conglomerate.

If anything, the optimism among American forecasters has intensified in recent weeks.

In expectation of an imminent upturn, they have focused on a growing number of economic indicators that show an improvement from the previous month -- if not in business investment, then in consumer spending and housing.

The latest spur to optimism came on Friday when the Labor Department announced that employers had eliminated 89,000 jobs in January, down from 130,000 in December, and the unemployment rate had fallen to 5.6 percent from 5.8 percent -- mainly because thousands of unemployed dropped out of the labor force and were no longer counted.

No one at the World Economic Forum spoke more exuberantly about the American economy than Gail Fosler, chief economist at the Conference Board, a New York research organization. "My role is to spread a little glee," she said at a packed session on the global economic outlook. "The recovery has already begun in the United States."

Like other American forecasters, Fosler argues, in effect, that once all the data catch up with what is actually happening today, the upturn will turn out to have started about now, nearly a year after the recession began.

Fosler appeared on the same panel with the more pessimistic Zimmermann of Berlin and also with Fan Gang, director of a Chinese economic research institute, who tactfully said nothing about the US, but declared that China's now booming economy might be headed for contraction, joining the rest of the world.

He blamed the yen, in part. Its falling value hurts Chinese exports, by making them relatively more expensive than Japanese goods. The rising value of the dollar, against the yen and other currencies, should also make Americans uneasy, several foreign experts said.

A strong dollar

For the moment, however, the strong dollar encourages foreigners to invest their savings in the US, in effect lending to the ever more indebted US. But once the dollar begins to weaken a bit, many foreign experts argue, the economy will slow, because the lending flow will be cut back and the cost of borrowing in the US will rise.

"We are more worried about this than you are," said Jacques Aigrain, chief executive of the Swiss Reinsurance Co, headquartered in Zurich.

Only one American economist participating in the World Economic Forum -- Stephen Roach, chief economist at Morgan Stanley -- openly shared the pessimism of the non-Americans, and his pessimism stood out. Roach appeared on the panel with Fosler, and he aimed most of his comments at her optimism.

She put her faith in consumer spending, the still strong housing market and her expectation that rising profits would restart investment, particularly investment in high-tech electronics gear.

Roach, in contrast, emphasized the downward pull of heavily indebted Americans and the frequent downsizing as companies closed factories and offices and laid off workers, to shed excess productive capacity.

At least one foreigner offered Fosler some support. "Let's not underestimate all the stimulus that the Federal Reserve has provided with its rate cuts," said Rakan El-Hoshan, managing director of the Hoshan Co, which sells office equipment in Saudi Arabia. "If there is not a recovery in America soon with interest rates as low as they are, then there is something fundamentally wrong."
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