Analyst: Flawed Perception Fuels Economy's Rollercoaster Ride

ECONOMIST Delos Smith said the three major markets — manufacturing, housing, and retail sales — all rebounded in January and February from a downturn caused in part by the coldest two-month period on record in US history.

So why does the economy seem to be dragging an anvil around?

Perception.

“Here's where the real problem comes — what people feel,” said Smith, a senior business analyst for The Conference Board. “The numbers might look good. But I can tell you that perception always wins. If that's what you think it's going to be, that's what it's going to be.

“Can we talk ourselves into trouble? Oh, you'd better believe it. We can do that very, very easily. To me, the reality is that we should have a good year. But you hear that word … should? We can't guarantee it because perception is the key. If people start to feel they have to cut corners, if the equity markets stay as gloomy as they are …”

Smith addressed the convention three days before the much-anticipated consumer-confidence indexes were released. And sure enough, consumer confidence in February reached its lowest level in more than four years, driven by mounting worries about jobs and the business climate. It was the fifth consecutive drop in the monthly index.

Smith said those numbers are “very troublesome” because they tend to draw people's attention away from the “fine print.” People recoil when they see headlines announcing massive layoffs, but they fail to absorb the message behind them — that most of it is through retirement programs, attrition, and phased-in layoffs.

Unemployment Rate

That was the case with Daimler Chrysler with its plan to shed 26,000 jobs over a three-year period. And then there was Nortel Networks, which already had cut 6,000 of the 10,000 jobs it announced in February that it would eliminate. The latest figures available at press time showed that the unemployment rate was at 4.2% in January, an increase of just 0.2% over December.

“A lot of people have the perception that these people are thrown out on the street,” Smith said. “You have to take a close look at what announced layoffs mean. It's not on that day — it could be years. Most have severance packages that go along with it.

“A lot of it is outsourcing. The person doesn't even move in any way and has exactly the same job. You wouldn't even know there's any change at all except he's getting a paycheck from another company. But that counts as an announced layoff.”

He said he had recently been at Nokia in Dallas, where there was an announced layoff of 1,500 that involved 700 temporary workers who, he speculated, “will have no problem finding a job.” He said the layoff really amounted to only 20-30 who were out of work.

His theory is that while the economy has slowed down considerably, a recession isn't imminent. Why do we feel like it has slowed so much? Because it was going so fast.

His analogy: You are traveling on Interstate 10 when a trooper pulls you over and tickets you for a speed of 100 mph. When you get back on the road, you set your cruise control for 70 mph. Do you feel like you're traveling at the speed limit? No.

“The expansion we had for the last few years was high,” he said. “Even if we slow it down to a more sustainable rate, you're going to feel sluggish. What is a slowing economy? Who do we even have a slowing economy? Why did the Federal Reserve want to have a slowing economy? All economies have limitations. We can go too fast and there are going to be a lot of problems. The Federal Reserve, as the arbiters, felt that we had economic expansion that needed to be slowed down or it would create more problems than if it wasn't.”

The growth isn't so mind-boggling. But so what?

“How many years can you grow at 30% or 40%?” he asked. “It's time to get out a handkerchief: Poor Sun Microsystems, they're only going to grow at 10-15%. Well, most companies would love to have growth of 10-15%. But if you're used to growth rates of 20%, 30%, 40%, then 10-15% looks kind of slow and stale, and if your stock is priced to have continued growth of this magnitude, you're going to have a problem.”

Target Homes, Cars

When the consumer confidence numbers were released, buried in the story was the fact that more consumers planned to buy new homes and cars in the next six months.

And the next day, Federal Reserve chairman Alan Greenspan — in announcing that there wouldn't be another cut in interest rates — argued that the “demand for consumer durables, while scarcely where they were a year ago, have not matched the type of weakness we've seen in the consumer confidence indexes.”

And the day after that, Detroit's Big Three automakers announced a smaller-than-expected drop in US vehicle sales during February — a seasonal adjusted annual rate of 17 million, below the 19.2 million from February 2000 that was the second-best ever.

Smith said innovation is rarely considered in an economic forecast, even though it can have a tremendous impact. There is also the factor of productivity — it rose at 2.2% in the fourth quarter, defying the normal scenario in which it would become weak or even decline when the economy is slowing sharply.

The Dilemma

Smith said trailer manufacturers face a dilemma.

“How many trailers do you make?” he asked. “Here you have record levels and you say to yourself, ‘That is not going to continue forever. What do I do? Do I start to slow down and maybe I don't have the right model? Or do I continue and maybe have an inventory accumulation?’”

The bad news: Their buyers are discretionary spenders.

“It's easy to cut out trailers (from the budget),” he said. “‘Wouldn't it be wonderful to have a trailer? But I can't, because I have to make sure (my financial situation is OK).’”

He said the biggest challenge for trailer manufacturers is not in the short term, because he believes that after a few slow quarters, the economy will perk up noticeably, but in the long term.

“I see us in all kinds of clashes,” he said. “Remember, it's a global financial system. Global, global, global. So many companies in different countries. They're just part of the building blocks of a social system. We've got to remember the other parts. There's education, the culture of society. There are laptops, cell phones, palm pilots. Any place you go, you're connected with your company.

“There are going to be more powerful computers, and your competitiveness is going to be challenged. You'd better be state-of-the-art and be able to adapt, because you're going to have a competitor throughout the world.

“Somebody has aimed a bullet just for you. Are you going to be able to dodge it or not? Adaptability. Can you do it? If you don't believe it, you're going to be dead.”

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