Dec. 2000 – Is a “Soft Landing” Still Possible?

Despite the rapid deterioration of the leading indicators during recent months, the prevailing view on Wall Street and in Washington D.C. seems to be that economic growth will slow from the pace of recent years, but that there will be no recession. When President-elect Bush visited the White House on December 19, President Clinton noted that “ I don’t think we’re going to have that [a recession] …But I think there are things to be managed. He [the President Elect] will have challenges and we ought to give him a chance to meet them ….” Just what might some of these challenges be?

The foremost is the possibility that consumers are in the process of a major retrenchment now that they are finding that stock market profits are not a realistic substitute for savings. During recent years, personal savings have decreased toward zero, even as stock market and real estate gains boosted households’ net worth. U.S. common stocks have, by some estimates, shed more than $3 trillion of value from the lofty peaks reached earlier this year.

Those peaks were short lived, yet it is clear that the value of households’ equity holdings, direct and via mutual fund shares, will have decreased during the year 2000 for the first time since 1994, probably by the largest percentage drop since 1973. At the same time, the dollar, which had been very strong during the 1990s despite a widening trade deficit, has begun to weaken in the foreign exchange markets. A continued slide of the dollar could prompt foreign investors to leave U.S. markets and, by raising the cost of imports, enable U.S. producers to raise prices. Attempting to defend the dollar and to restrain price inflation could make it more difficult for U.S. monetary authorities to cut interest rates.

Indeed, at its most recent meeting, the Federal Reserve Board, although indicating that it now views the possibility of a recession as a greater threat than an acceleration of price inflation, decided to make no changes in its discount rate or its Federal Funds target rate. Even if, as is widely expected, the Fed does cut rates during the months ahead, monetary policy might not be very effective in shoring up either spending or the securities and foreign exchange markets.

Reportedly, one-fifth of bank holdings of business loans are in various “troubled loan” categories. Commercial and industrial loans are at an all-time high in relation to business inventories, and faltering sales could quickly boost unsold inventories and non-performing loans alike. The resulting pressures on lending margins could make the banks reluctant to lower their rates for any but the most creditworthy borrowers.

In these circumstances, it might seem that the major across-the-board tax cut favored by President-elect Bush during the election campaign would be the most promising means of putting funds in the hands of consumers and businesses. Unfortunately, the delays and uncertainties of the legislative process render fiscal policy virtually useless for contra-cyclical purposes. In short, Alan Greenspan and the Federal Reserve are the ones on the spot; having brought on the long-awaited slowdown, it remains to be seen whether they can stop it from developing into a recession.

Also in This Issue:

What Rate of Return Can An Investor Expect?
Investing in Switzerland is Getting More Expensive
Whither Ma Bell?
Alternative High-Yield Dow Investment Strategy
The Dow Jones Industrials Ranked by Yield
Recent Market Statistics