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Economic growth was nonexistent in the fourth quarter, and the first quarter could prove even worse. That's not good news for any investors hoping the stock market will rebound. Until the market can get a good picture of when the economy will sustainably turn around, consumer-dependent sectors from technology to retail to transportation could remain suppressed. In short, stocks such as Intel (Nasdaq: INTC ) , Abercrombie & Fitch (NYSE: ANF ) , and FedEx (NYSE: FDX ) aren't likely to move higher for any length of time.
The Obama administration has stepped up to try to soften the blow to the careening economy by passing a stimulus plan and detailing a housing plan for foreclosures. But how much will the stimulus and housing plan help to shore up the economy, and in turn help stocks such as Foster Wheeler (Nasdaq: FWLT ) , Toll Brothers (NYSE: TOL ) , or Centex (NYSE: CTX ) ?
Bill Greiner, chief investment officer for UMB Asset Management and UMB Bank, and chief economist for Scout Investment Advisors, weighed in during an interview. (For part 1 of my interview with Greiner, click here.)
Jennifer Schonberger: Could you sum up your outlook for the economy?
Bill Greiner: I expect the economy to come out of recession in Q4. I think as we come out of this there are various questions: what's going to happen to consumption, to government spending? What's happening with this package? My view is this: The real problem in our economy is too much debt. That's going to be the overriding issue regarding the shape and form of our economic environment for probably the next three, five, 10-year period on a secular basis. What that means is that consumption in and of itself is no longer going to be the sole driver behind economic growth, like it has been for the last 25 years.
When you look at GDP, there are four segments to it. There's consumption, investment, government spending, and net exports. Consumption from 1945 to 1982 represented between 61% and 64% of GDP. Government spending over that same time period represented between 25% and 29% of GDP. A couple of years ago, those numbers got to 72% for consumption, and government spending fell to 19% of GDP. So the last five-to-10-year period we've come through -- on a long-term level -- was an abnormal period of time for the U.S. economy. I think we're getting back to more of a balanced economic environment as time goes forward, with consumption representing a smaller piece of the growth pie than perhaps has been the case over the last 20 years. What that means is we're probably going to see more government spending, higher tax rates, and probably more investment being made by businesses both nationally and internationally. I think the economy is going to more closely resemble the economy we saw between the end of World War II and 1982.
Schonberger: Is the new housing plan going to play much of a factor in helping to bring the U.S. out of this recession?
Greiner: No, I don't think it will, mostly because it's not the real issue with which the economy is dealing. I think the housing problem is a symptom of the underlying problem in the economy, which is too much debt. There's just too much leverage within the economy, the financial system, consumers, and the nation's balance sheet. Anything that basically doesn't address that issue in my mind is treating the symptom, rather than the disease itself....
I look at the recession as a cyclical situation, not secular in nature -- and the problem I talk about is secular in nature. It's a problem that our economy is wrestling with at the core right now, and is probably going to continue to wrestle with the next three to five years.
Schonberger: So now do you think the government is sort of just getting in the way?
Greiner: I think they are basically taking a problem that is directly negatively affecting between 3% and 7% of Americans, depending on what data stream you look at, and they're willing to underwrite that problem on everyone else's expense.
That's the other issue I have with this plan. It's a plan that basically increases the debt in the country on a long-term basis; if not that, increase taxation rates eventually on the people who actually pay taxes in the United States, to the benefit of people who are having problems with their housing payments.
Now, the data that I've seen suggest between 3% and 4% of homeowners are going through some degree of foreclosure right now, and about 8% of Americans are actually behind on their mortgages. To hear it out of Washington, you would think that half the people in the country aren't paying their mortgages right now. There's nothing further from the truth. So looking at this plan and saying, "We're going to do this broad brush, wide sweeping plan of basically socializing the housing finance system, and the government is going to do certain things to basically reward bad behavior at the expense of people who haven't acted poorly in the past," just isn't the right thing to do in my opinion.
Schonberger: Is the stimulus plan going to work? What are the pros and cons, in your opinion?
Greiner: It depends on what you want it to do. If you want it to pull us out of recession, it's not going to do that. If you want it to soften the recession, then yes, I think it is going to do that. By my calculations, it looks like it's going to add between 1.5% to 2% to GDP growth in 2009, and probably another 1% to 1.5% to GDP growth in 2010.
Now, a big chunk of the plan is basically repaying the states monies that have already been spent. Out of the total $787 billion package, $40.6 billion, or 5% of the plan, is going to pay states to try to bail them out of their surplus spending problems. That's money that's already been spent in the economy.
Our viewpoint is that the economy is probably going to slow between 1.5% to 2.5% this year, compared with a 4% contraction rate without the plan.
Schonberger: When do you expect the impact of the plan to kick in?
Greiner: Probably sometime between the second, maybe third quarter.
Schonberger: Are you at all concerned about inflation down the road, given the amount of money that's being pumped into the economy?
Greiner: Yes. We're concerned about the inflation issue and the excess money supply that's starting to appear in the system. If you look back in time, with almost any economic environment that almost any country has gone through, whenever you've seen this kind of excess monetary stimulus that's not being absorbed directly by the economy, then a risk of rising inflation is almost always present.
The numbers that I've seen would suggest that M2 (a measurement of money supply and an economic indicator used to forecast inflation) is growing right now, on a real basis after inflation, by about 23%. That's the strongest growth rate we've seen in M2 in decades in the U.S. Our thought is that when you start to see the economy begin to gain traction -- and our outlook now is calling for the economy to stop going down probably sometime in the fourth quarter -- then the risk of inflation impact is going to emerge because the velocity of money starts to gain traction. Banks then start taking that excess money supply and start throwing it out into the economy through increased business lending practices. That's generally when that money gets into the real economy, and it starts impacting prices.
Schonberger: So then do you think deflationary worries are overdone, especially in light of the PPI and CPI numbers we saw last week? Or are those numbers just anomalies, given that increases in gas prices seemed to contribute at least a lot to the PPI number?
Greiner: Yes and no. I think the move on the upside in the inflationary numbers [is] an anomaly, depending on your time horizon. They're an anomaly if your time horizon is six months. More than likely, we're not going to see a significant move on the upside in inflationary pressure as long as final demand in this economy remains punk. I don't think that's going to change until the fourth quarter. After that, those numbers really start coming into play on a more sustained basis.
Schonberger: How does this recession stack up against prior ones? A lot of times people compare the current one to the '73-'75 and '80-'82 recessions, or obviously the Great Depression. Is the Great Depression even a warranted comparison?
Greiner: Not at this stage, in my opinion. It's a frightening time because you have unemployment rising to probably 10% or more before it's all over, and the economy contracting by somewhere between 5% to 8% after all is said and done. Things are not good.
When you look at the 1930's, it appears that the economy now is very similar, as far as the weakness is concerned. The breadth of the weakness is similar to what we went through in the 1970s. But there are a couple of big differences this time around. One is that this is a global contraction, unlike in the '70s, '80s, and the 1930's, where it was more of a localized issue. The whole world didn't collapse or shrink like the world is right now. Many segments of the world's economies were decoupled then.
Beyond the globalization issue, it's been 25-28 years since we've had a true table-pounding recession like the one we're dealing with right now. So much time has passed since our last deep recession that most of the population in the U.S. hasn't experienced what a deep recession is about. I think it's the first time most of our population has seen this kind of contraction. The majority of people within the business and political world were not in those positions back in 70's and 80's. So I think that's another reason why it's so frightening, and why people are reacting the way they are right now.
As far as the broad numbers are concerned, this is similar at this stage to the recession in the late 1970s, early 1980s.
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