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CNN Live At Daybreak

Is the Economy Truly Headed for a Recovery?

Aired July 19, 2001 - 08:17   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
COLLEEN MCEDWARDS, CNN ANCHOR: The number-crunchers are talking about Federal Reserve Board Chairman Alan Greenspan today. It's all about what he said and didn't say about the economy. And this is a strange economy, indeed.

Corporations continue downsizing. But consumers just keep right on spending. We are joined now by Mike Mandel from "BusinessWeek" and by Michael Sivy from "Money" magazine to debate this a little bit.

Gentlemen, thanks for being here.

MIKE MANDEL, "BUSINESSWEEK": Glad to be here.

MICHAEL SIVY, "MONEY": My pleasure.

MCEDWARDS: Mr. Greenspan said the economy is weak and susceptible, but he sees signs of a bottom.

So let's just take this apart a little bit. I'll ask you about signs of a bottom in a minute. But let's take "weak and susceptible" for the moment.

Mike Mandel, what do you think?

MANDEL: Oh, I think the economy is very weak and getting weaker.

So far, we've seen a fall in business investment. Housing and autos have stayed strong. But, frankly, that's the result of the interest rate cut so far. I think we're going to get into the second half of the year and the consumers -- which have been holding up the economy -- will start to fade. And we'll see the U.S. slide into a -- into a deeper recession.

MCEDWARDS: Michael Sivy.

SIVY: Well, you know, I'm more optimistic than that. I kind of think the crash in tech stocks has confused a lot of people. The large part of the economy is not based on technology, in that sense. And it is very sensitive to interest rates. We've had the biggest drop in interest rates for the time span in the history of the Fed.

They're pushing very hard to stimulate the economy. And I think what we've really seen over the last couple of years is a bubble in the stock market that's been driven by a lot of the overenthusiasm for tech, which really has been people's spending venture capital money.

And when that ran out, the tech stocks crashed. That will affect the way the economy comes back. It will affect the shape of the recovery. But when you have the Fed dumping this much money into the system and cutting rates this fast, I think a recovery is really baked in the cake. And the only historical instance in which this kind of a cut didn't produce a strong recovery was during the Depression, when the banking system was in very serious trouble.

MANDEL: That's very reassuring for Americans. The problem is, is that this is a downturn that wasn't forecast by anybody. This is an economy that was driven by technology in the 1990s. And as technology unwinds, what we're going see is it gradually pulls down the rest of the economy.

Now, the fact is, historically, it takes about a year to break people's expectations after a boom. And as long as their expectations are still high, they're still expecting a recovery, then what happens, they keep spending. We're going to get to the end of the summer or the late Fall -- sorry, the early Fall -- people are going to realize, you know, that the economy is not going to come back so fast.

And I think then we'll see a different sort of behavior.

MCEDWARDS: Well, can you guys ...

SIVY: Well, I think it ...

MCEDWARDS: Just let me interrupt, if you would, for a minute, Michael. I mean, can you guys explain this one to me. Mike raises the issue of consumer spending. I mean, corporations are laying off. People in the United States keep spending their money. And we keep hearing, if they stop, this economy is in trouble -- Michael Sivy.

SIVY: Well, people spend most of what they earn.

Most people spend most of what they earn. And consumer spending is almost entirely a function of unemployment, which is still very, very low by historical standards. For what's supposed to be this terrible downturn, we're under 5 percent unemployment.

You know, the point that people didn't forecast the downturn is true. But then why expect that they would be right in forecasting the upturn? I mean...

(CROSSTALK)

MANDEL: That's right. That's exactly right.

SIVY: You've got exactly the same failure to look ahead and tendency to look backward. They were looking backward when stocks were going up and they're looking backward now. The earnings that we're seeing are reflecting the economy of the past six months. The best forecaster is the stock market itself.

MCEDWARDS: Mike Mandel... SIVY: And the sell off climaxed...

MANDEL: The people are spending more than they make now. The savings rate is negative. And the amount of borrowing just keeps going up and up and up. People are banking on a strong recovery. When that -- when that doesn't happen, they're going to be forced to retrench.

And as for the stock market being a -- being a great predictor, you know, the fact that the stock market goes up, the stock market goes down, sometimes it's a predictor. Sometimes it's not. In this particular case, the technology part of the economy -- which is where all the growth has been -- is now limping and not going to come back until 2002, maybe, at the earliest. And it's like taking the fuel out of a car. The car can coast for a while, but eventually it comes to a halt.

SIVY: Well, I think it's a mistake to look at technology as a monolithic block. Basically, you have one category of big tech stocks that are very successful, sound businesses, that have earnings. And they are continuing to sell stuff. Corning may be down from $113 to $13, but they are still selling fiber-optic cable.

(CROSSTALK)

SIVY: And then you have a lot of small-tech stocks...

(CROSSTALK)

SIVY: ... that never made any money. You have a lot of small- tech stocks that were never real businesses.

MCEDWARDS: Mike Mandel, go ahead and respond to that.

MANDEL: What did IBM say yesterday?

IBM said there's more weakness coming in the second half. None of these guys see any real recovery. The big stocks, the small stocks, the big guys are all saying this is the worst tech deluge that they've ever seen.

Now, the fact is, it takes time for that to permeate back. But to think of the U.S. economy as not being driven by technology, it doesn't have any other motors to it. To think that housing and consumers can keep propelling the economy when everybody is basically tapped out, that's a very difficult case to make.

You know, the fact is that the U.S. has a very strong economy. It takes a long time for it to wind down. And you shouldn't expect it to sort of fall apart overnight. For what's happened is that the sluggishness is there. You know, the Fed has cut rates. It has had an effect. But if we go into the second half, I think that people's expectations of a 3 or 4 percent recovery are just crazy at this point.

MCEDWARDS: Gentlemen, we've got to wrap this up real quick. But I want to end it with a little -- you know, a little bit of direction for consumers.

I mean, do you -- do you guys see a sign of a bottom here? And, you know, should people be sort of getting back into the market in a way that they were before?

Michael Sivy, real quick -- and then Mike Mandel.

SIVY: Well, I think that -- I think that we are going to see a bottom in the late third or early fourth quarter. I think the economy is still declining, but we are through the worst of it. And this is a great time for people who are very patient long term, disciplined value buyers, to buy stocks while this level of pessimism is in the air, because that's how you get good buys.

MCEDWARDS: Mike Mandel.

MANDEL: Well I think that -- we're talking about a decline in the third quarter, maybe into the fourth quarter, maybe into the beginning of next year. You know, it might be a good time to buy stocks if you've got a lot of money. But if you're running tight to the vest and you've got a lot of debt, you should be pulling in your horns at this point.

MCEDWARDS: OK, Mike Mandel,, Michael Sivy, thanks so much.

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