Corporate Leaders Wary About Coming Months

To say that the economic outlook for 2002 is unsettled would be an understatement. Almost every forecaster agrees that the most critical factor for determining the growth trajectory over the next year is consumer confidence. Confident consumers will return to airports and hotels, to car dealerships, and to shopping malls. Businesses will respond to renewed demand by increasing employment, orders and production, Renewed growth will spur business investment and help pull the technology sector out of its horrendous slump. Restoration of profitability will revive equity markets. If all this can be done without rekindling inflation (no life-signs can be found at the moment), then we are off and running in another expansion.

The good news is that consumer confidence is proving to be more resilient than many feared in the darkest days following the September 11 attacks. The preliminary reading of the University of Michigan's Index of Consumer Sentiment for October showed a continued rebound from end-of-September levels. But, the big worry now is that a continually worsening employment picture will spook consumers' outlook for their own personal financial situation, causing further retrenchment in the form of debt paydown and suspension of plans for holiday spending, vacations, home improvement projects and large durable goods purchases. At the moment, ripple effects from the events in September are putting a damper on economic performance.

In a recent edition of the Goldman Sachs publication "Global Economics Weekly" (October 17, 2001), senior economist John Youngdahl summarized the impressions from a mid-October meeting with a group of senior corporate executives and board members. Negative ripple effects are most definitely underway.

The travel industry continues to be hardest hit. Airlines reported load factors remain far below normal, even though capacity has been cut by about 20 percent across the board. Unless traffic rebounds soon, the $5 billion in federal direct aid to the airlines will not come close to covering the losses. One of the largest hotel chains reported that occupancy rates were still 25 percent below normal, although convention traffic at the chain has come back. The problem is that business and leisure travel remains way below normal levels.

Large reductions in auto and truck production by U.S. firms could be announced at any time. Part of this is the due to a drop in consumer demand, but the auto industry is also suffering the ripple effects of the decline in travel. Rental car companies absorb a large proportion of annual vehicle production, but demand for new vehicles from this sector has plummeted given that rental business at airports has been down 50 percent or more. With production cutbacks at auto makers will come further payroll cuts, sending more ripples through the economy.

Retailers saw increased traffic in shopping malls in early October. Catalogue retailers reported good demand through early October as well. Major retailers reported they will be very cautious in placing orders for 2002 as they expect some weakening in demand as unemployment continues to rise. The retail profitability picture does not look promising even if consumers continue to buy because prices have been slashed to stimulate demand. In particular, high-end retailers have slashed bookings so more of the merchandise destined for the upscale stores is migrating to the discount stores and is being marked down in price.

Corporate managers want Congress and the Administration to focus on measures that will restore confidence and provide short-term stimulus of demand. Confidence is the key. Without improved public confidence, many executives worry that a stimulus plan will have little effect. Youngdahl writes, "Business managers are mainly worried now about the secondary effects on confidence and spending that could derive from the incipient surge in joblessness, which could unfold over months. This underscores the importance of fresh news about employment conditions, and the latest reports have been uniformly very poor."