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Year-end Interview with Jack Beebe

By Suzanne Slade, San Francisco

At the close of a momentous year, the 12L Times sat down with SVP and Director of Research Jack Beebe and asked him about economic prospects for 2002. Some days later, President Bob Parry announced that Jack will be retiring in May of next year, and so the 12L Times would like to take this opportunity to wish him a long and happy retirement.

First of all, the 12L Times wanted to know, what is the context for the current recession? Jack explained that only one twentieth-century recession serves as a comparison for the current economic period, and that was in the late 1920s. "It was the end of a very long period of productivity enhancement because of the invention of the electric motor, which was followed by mass production of automobiles and other goods," Jack explained. Automobiles led to a land boom throughout the U.S., and stock prices started rising dramatically in the late 1920s until the famous stock market crash of 1929.

Similarly, the 1990s boom arose from technology that began in 1955 with the invention of the transistor, leading to the extraordinary technological advances of the 1990s. However, Jack believes, just because the 1990s experienced a technology boom comparable in many ways to the 1920s, there is no reason why the new millennium need begin with a sustained economic downturn - far from it.

Cycle Comparisons

If we had more of these cycles to look at, Jack thinks, we would probably find that in the growth phase, everyone becomes too optimistic, overprices the values of the assets, and buys too much of whatever is causing the euphoria. In the 1920s, it was land that was euphoria-inducing. More recently, we had overinvestment in technology goods with very high technology company stock prices. "These stock prices seemed to me at the time to be unsustainable," Jack said. "Eventually there was a general realization that the Internet and technology companies were overpriced, and that there was too much investment in communications equipment - such as all the fiber optic cables, for example, so many of which still are not even lit."

Not a Normal Recession

Jack's view is that the current recession is really a business investment recession. Consumer spending has not dropped off much at all, which is the opposite pattern of what normally happened in other post-World War II recessions. These "normal" recessions usually involved too much growth, too much output, a sharp pick-up in price inflation, and a rise in interest rates - both in the market and brought about by the Federal Reserve - followed by a sharp falling-off in consumer spending. "My guess is that the other shoe, which is consumer spending, hasn't really dropped yet. We may get a lull in consumer spending next year," Jack believes.

Consumer Spending

Why hasn't consumer spending dropped off much recently, even in light of significant layoffs? Without taking into account the no-interest incentives to buy automobiles, the rest of consumer spending is quite strong. One reason is that the very sharp cuts in the interest rate have really lowered short-term borrowing costs. This has also helped to bolster asset prices, so people feel confident that stocks have not fallen more than they have already, and housing prices are still holding up. "I think the lower interest rates have kept the consumer going, and the fairly large tax gift in the second half of the year has just fully kicked in during recent months." Jack said. "Mortgage refinancing also gives people more disposable income after paying financing costs, and lower energy prices also have helped. Government policies really have been geared toward consumer spending."

However, Jack believes that the risk during the next three to six months will be consumers' reaction to additional layoffs, so that their spending may retrench, which will cause a very slow recovery. And stock prices could fall further.

The Forecast

"That is the most worrisome alternative," Jack said. "Our forecasts show the economy flat in the first quarter of 2002, and then starting to pick up with a small growth rate - 1.5 or 2 percent in the second quarter - and then picking up a little further to around 3 percent in the fourth quarter of next year. That's a slower recovery than we would have forecast three or six months ago. If this is a 'V'-shaped recession, it's a very long, shallow 'V'! We may have to accept a period that is not a stellar recovery in order to get the most sustainable balanced growth beyond the next six months."

Better Things to Come

But there is good news. "I think we're going to come out of this with a much more rational technology boom," Jack said. He believes that the technology side of the economy has a lot to offer. "Technology is bound to start coming back by the second half of 2002," he predicted. "Then, there will be new waves of new goods. This will generate productivity enhancements and growth. In my view, there is nothing wrong with the new economy; what was wrong was that people were paying too much for the stocks - and they possibly still are."

No Depression Necessary

And, Jack believes, we don't have to go through the equivalent of the 1930s Depression before the current recession ends. "Other mistakes were made in the 1930s," Jack explained. "First of all, the underlying technology shock to the economy was much greater then. Today we don't have the international gold standard and fixed exchange rates. We have deposit insurance, a flexible Federal Reserve, and unemployment insurance. Government spending programs are much greater, and we have a keen understanding of what went wrong in that 1929-1933 period."

In Jack's view, the 1929 stock market crash should not, in and of itself, have created the Depression of the 1930s. What happened was that the government tried to balance its budget for fear that people would otherwise lose confidence in it. So it actually raised taxes. "And the Fed tried to maintain confidence in the currency," Jack said. "So, while interest rates fell to zero, the Fed didn't create money, and the rates didn't hit zero until 1933. The Fed is keenly aware of the 1929 period and keenly aware of the decade that the Japanese are still going through, and it wants to move ahead of that."

Effects of September 11

What about the effects of September 11 and subsequent military spending on the economy? "I think we were in for very weak third and fourth quarters of this year anyway," Jack responded. "September 11 definitely jolted the economy down, and if we exclude all of these auto purchases because of the zero financing incentive, it caused disruptions that couldn't help but be negative - for example, to the airlines, travel, and tourism. On the stimulative side, there is a lot of spending on security, but that doesn't balance it out."

No Crisis

Wartime spending, though, is always a stimulus to the economy. "I'd much rather see us spending on infrastructure and schools," Jack said, but he noted that, while some military spending results in money spent abroad, all the munitions and supplies come from here. "So that's economic stimulation all the way through the next couple of years," he explained. This is another reason not to get too worried about the near-term lull in the economy. "We're not in a crisis," Jack says, "although that word gets used for everything today."