copyright © 2003 global insight, inc.1 presented by: james diffley us regional services global...

Copyright © 2003 Global Insight, Inc. 1

Presented by:

James Diffley

US Regional Services

Global Insight

March 12, 2003

The Economic Recovery:Still Waiting


What Kind of Recovery is This?

• Clear Spending Gains

• ..But less than Capacity (says the labor market)

• And now a Soft Patch

• Why the continued “Growth Recession”?1. No business hiring

2. Delay in investment recovery. esp business construction and telecoms

3. Confidence crisis of Stock Market Capitalism

4. War Jitters– oil prices, sentiment and equities


Baseline – Short War

• Short war (two months or less) starts in March

• Minimal coalition casualties

• No major oil disruption

• Oil prices spike to $40 per barrel, but average $31.50 in Q1 and $25.30 for the whole year

• The dollar falls gradually, losing 4% of its value against industrial country currencies during 2003

• Falling confidence and stock prices hamper growth, but rebound after successful conclusion of war

• Tax cuts plus additional $50 billion in defense spending help to sustain the recovery

• 60% probability


Victory Without War

• Either a war that lasts less than a week or a regime change in Iraq without a war

• Sanctions against Iraq lifted quickly

• Oil prices drop below $20 per barrel, but recover gradually as world demand strengthens

• A rebound in confidence and equity markets, along with lower oil prices, boost growth worldwide

• Weaker defense spending in the U.S. is offset by stronger growth in consumer and business expenditures

• 20% probability


No War/ No Resolution

• No war but uncertainty over Iraq continues throughout the year

• Geopolitical tensions remain high

• Oil prices remain high (averaging $30 per barrel for the year) and volatile

• Consumer and business confidence, along with the stock market, remain depressed

• Global growth, especially outside of North America and non-Japan Asia, remains weak

• Less than 10% probability


Long War

• War drags on for six months or more with higher coalition casualties

• Confidence falls further and remains depressed longer

• Oil prices spike to $50 per barrel and average above $30 per barrel in 2003

• Defense spending rises by $70 billion

• The dollar falls by 10% on a trade-weighted basis

• The Fed cuts interest rates by another 50 basis points



Bad War

• The war escalates into a regional conflict

• Oil prices spike to $60 per barrel, because of supply disruptions, and average $40 per barrel in 2003

• Consumer and business confidence plunge

• Consumers retrench and capital spending falls once again

• A double-dip in the U.S. and world economies

• The dollar falls by 20% in trade-weighted terms



World Growth

-1

0

1

2

3

4

5

2001 2002 2003 2004 2005 2006 2007

Baseline-Short War Victory Without War

No War/ No Resolution Long War

Bad War

(Percent change, annual rate)


Longer War: Sentiment and Stock Market Hits

040302

100

90

80

70

60

1400

1200

1000

800

600

Consumer Confidence: Baseline (left) PessimisticS&P500: Baseline (right) Pessimistic


Iraq War and Pessimistic Scenario

Pessimistic—Longer WarPessimistic—Longer War

• 2Q war stalemate at first

• Sentiment drops 16 pts 2Q

• Oil prices $7bbl higher 2Q. Stock prices 25% lower

• Extra military spending $87 bio through yearend

• No new tax cut

Longer War Economic Effects 2 Qtrs down GDP, 2003 avg growth 2.2% less, growth

higher in 04

Quick War with IraqQuick War with Iraq

• Ground action within month. Oil price spikes further before kickoff-- then falls quickly on favorable result

•Consumer sentiment/ stocks drop further then recover quickly

•Extra military spending, $70 billion


Conclusions

WEAK RECOVERY

TAKES OFF

• Government spending huge, earlier tax cuts

• Interest rates highly expansionary—housing

• Early inventory boost fading, consumer soft patch

• Peace boost early, then jobs, investment turn mid 2003, strong by yearend

• Exports in 2004

RISKS

• Hiring lags—weak income

• Extended war uncertainties-bad results

• Further Stock Market collapse

• Other consumer/house wealth

• Major dollar decline (long term only)


Employment Change % for 12 months ending 12/02

0.7 to 2.40.0 to 0.6

-0.6 to -0.1-2.2 to -0.7


Unemployment Rates December 2002

6.0 to 7.45.0 to 5.94.1 to 4.93.0 to 3.9


Change in Financial Centers (FIRE Employment)

200220012000

104

102

100

98

96

94

92

Mar

ch 2

000

= 10

0

Boston New YorkChicago San Francisco


% Change in non-Mfg. Employment 3/01 to 12/02

1.4 to 2.90.0 to 1.4

-0.8 to 0.0-2.9 to -0.8


% Change in Mfg. Employment 3/01 to 12/02

-4.8 to -0.7-7.1 to -4.8-8.9 to -7.1

-13.5 to -8.9


Regional Retrospective : Recession Job Loss

05030199979593918987

4

2

0

-2

-4

-6

perc

ent c

hang

e ye

ar a

go

NORTHEAST SOUTHMIDWEST WEST


Median Existing Home Price Inflation1999-2002( Annual Percent Change)

8.9 to 14.45.9 to 8.84.6 to 5.82.6 to 4.5


Forecast: Job Growth by State 2002-2007Annual Growth Rates

1.4 to 2.71.2 to 1.30.9 to 1.10.7 to 0.8

copyright © 2003 global insight, inc.1 presented by: james diffley us regional services global...

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