The Welch Way

The Economy: A Little Clarity

Just recently, we were walking down Lexington Avenue in New York when a young man in a suit stopped us. He told us he worked on Wall Street, read this column, and wondered if we might answer a question on the spot. We agreed to try, but he stumped us.

"When are things going to get better?" he wanted to know.

"Sometime in 2010," was our answer, "maybe."

Can you blame us for hedging? This recession has government experts and renowned economists reeling—that is, when they're not disagreeing with one another—clouding any kind of cogent consensus about what's ahead. Some people are seeing glimmers of hope, others dungeons of doom, and there are proponents of everything in between.

As for us, the best we can offer is a list of what we think we know for sure about the economy right now, and, perhaps as importantly, what we know we don't know at all.

Let's start with the five phenomena that seem fairly certain to us.

First, it appears the economy has hit some kind of bottom. We draw that conclusion based on order levels in every business we're associated with through private equity and consulting, plus what we hear on our travels from executives of every stripe. After a steady decline from May 2008 through January 2009, we've been told, orders received in February, March, and the first half of April were similar to or slightly better than January's. This good news, so to speak, is tempered by capital equipment orders that continue to slip. But all in, we feel confident (O.K., somewhat confident) in saying the economy has reached its nadir.

Second, we think we know that an uptick in demand will yield a quick response from the economy. Why? Because inventory reductions have been so thorough over the past nine months that any kind of surge in orders will reverberate through the supply chain.

Another thing we think we know—and perhaps the most relevant of the bunch—is that the American banking system is stabilizing. Yes, there is persistent criticism of the government's emergency care, with TARP, TALF, commercial paper backing, and the rest. But there can be no doubt that credit is starting to flow again, both from banks and from the many critical nonbank lending institutions.

Another "known" in our view: that Americans are generally feeling better, as reflected in the recent jump in the Consumer Confidence Index. This isn't a total surprise, what with the surge in refis, lower mortgage rates, and tax refunds. However, our incoming mail indicates that a vast majority of people are still terrified of losing their jobs, and that emotion will probably remain for some time if unemployment reaches into the double-digits, as is widely expected.

Which brings us to our final "sure thing"—and this one is alarming. President Obama's budget, based on the assumption of 4% GDP growth from 2010 through 2013, is simply not realistic. During the leveraged euphoria of the '80s and '90s, GDP growth averaged closer to 3%. These days, with deleveraging everywhere, larger deficits, and consumers turning frugal, GDP growth is more likely to be near 2%. The outcome? Not reduced government spending, we'd wager, but higher taxes and more federal debt.

As for what we don't know, well, for starters, we have no clue about the question on everyone's mind: the direction of Dow. One day we think, "All that government money pouring into the economy has got to work, at least short-term." And the next, "Holy Cow, those looming deficits are going to cause a huge crash down the road." No wonder we've become such cowards, sticking our own investments mainly into Treasuries and high-grade corporate bonds. We've never been more puzzled by the stock market.

Finally, we don't have any idea when the economy is going to turn around. Even if we are at the bottom, we could be in the "bathtub" for a while. It's like we told our new friend in the street. We believe something good will happen in 2010, but we can't promise that with 100% certainty. Indeed, the only thing "guaranteed" these days is that a lot of uncertainty is a now a fact of life.



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