Ask Miss Cleo

Last updated on May 13th, 2019 at 02:21 pm

Dederick says war is big unknown in economy; Cappiello sees Dow back to 11K
Will the Dow Jones Industrial Average be back up to 11,000 by the end of next year in response to a resurging US economy?
Or is the war on terrorism such a big unknown that any economic forecast is as credible as a call to Miss Cleo – the “psychic” made famous in TV commercials?
It depends on whom you ask.
Speakers at two economic forecast events in Milwaukee in recent days gave differing views of the situation – as one might expect of economic forecasts. But both Robert G. Dederick of North Central Trust Co. in Chicago and Frank Cappiello of McCullough, Andrews & Cappiello in Baltimore see a strong recovery following the current economic malaise.
The “when” is the big question.
“We are in an extraordinarily unusual situation, said Dederick, the annual guest of Milwaukee Western Bank. The war factor presents too many unknowns, he said, including just how complicated and protracted the war might become. “We just don’t know how big this thing is going to be.”
That, Dederick says, has compounded economic uncertainty. “We don’t know the economic outlook,” he said of himself and fellow economists. “So neither do you.”
Dederick, who spoke on Nov. 1, called the current economy recessionary, with businesses now dragging things down.
“But all recessions end,” he noted. And contributing to a strong recovery could be two factors, he says. One is Washington, which, prior to Sept. 11 was “trying to solve tomorrow’s problems today, which is not something politicians usually do. Now, they’re back to dealing with today’s problems; and that’s a major change.”
The other big factor that could lend itself to a strong recovery is the shift in apparent activities of Federal Reserve Chairman Alan Greenspan, who Dederick said had been functioning as America’s chief operating officer but who has been “demoted to a support role of chief supply officer.”
But while saying the war poses a big unknown, Dederick does see the potential for a recovery coming by the second half of next year.
Dederick and Cappiello concur that post-Sept. 11 spending on security measures – spending that does not enhance productivity – will contribute to the economic struggles. Delays created by security measures don’t lend themselves to just-in-time delivery systems, Cappiello noted.
“We’re going to shift resources away from investment, and into defense – defense of ourselves and of our nation,” Dederick said.
The outlook, Dederick added, is for a slower growth pattern, “but nothing intolerable.”
But he reiterated his concerns about uncertainty. “In the end, what happens depends on what will happen in the war,” Dederick said, noting that the lofty war goals set by the Bush administration will be hard to achieve, and, thus, more malaise could be created if the war drags on.
“The dominant motif is uncertainty,” he concluded. “Who’s going to be aggressive when he doesn’t know what’s going to happen?” You might as well call Miss Cleo for a prediction, he wryly said.
Cappiello agreed that Sept. 11 “will change us in ways economically that we can’t forecast,” noting that the vulnerability of the US which Sept. 11 starkly brought to light “reaches into the stock market.”
But outside of New York and Washington, nothing has changed with the basics of the US economy, even though it’s not operating at 100%.
The US economy was already headed toward recession when Sept. 11 came to pass, with events of that day punctuating that fall.
The elements of recovery are being put in place, says Cappiello. Those include:

  • Interest-rate reductions, which “sooner or later will do something” to stimulate the economy. Related to that is the increase in the money supply, which Cappiello likened to tinder. “The first spark will light the fire; but we don’t have that spark yet.”
  • Tax cuts, particularly those currently under consideration for business. Those cuts, if approved, would stimulate capital purchases. “If you tell business people, ‘You can buy equipment now and write it off …’ people will buy. You need to stimulate demand.”
  • Decreased oil prices “are like a big tax cut.” Per-barrel prices are down 25% “and won’t come back up anytime soon.” They” stay in the $20-range, and may even dip to $19 per barrel due to a slowed world economy and subsequent reduced demand.
    And while subsequent terrorist attacks on the US may occur, Cappiello, who spoke on Nov. 5, said that additional attacks will have less and less of an impact on the economy. He noted how the economies of Israel and Great Britain are sustained despite recurring terrorist attacks in those nations.
    The US economy will bottom out sometime in the first quarter of 2002, Cappiello believes, with a recovery kicking in in late April or in May.
    Cappiello sees a V-shaped recovery, with the Dow Jones Industrial Average reaching 11,000 by the end of next year. Now is thus a good time to buy stocks in solid companies such as Boeing, Disney and Intel, he added.
    “Companies are bringing cost structures down dramatically,” Cappiello observed, noting that it’s not just labor costs which are being trimmed.
    Cappiello made is comments during the annual forecast breakfast of Milwaukee School of Engineering sponsored by Robert W. Baird & Co.
    November 9, 2001 Small Business Times, Milwaukee

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