His Job: Forecast the Unforecastable

RMA Journal, The, Nov, 2001 by Maurice H. Hartigan II

An Interview with Mark Zandi

Mark M. Zandi is chief economist at Economy.com, one of the nation's premier sources of economic data and information. A guest speaker at a number of RMA conferences, Mark has achieved a high level of credibility among RMA Associates and his presentations are a highlight of any conference agenda.

Maury Hartigan, RMA's president and CEO, interviews Mark in this article. The initial intention of the interview was to gauge whether or not the U.S. was looking at the beginning of a mild recession and, if so, what steps bankers should be taking at this time. Then September 11 shook the U.S. like a nationwide earthquake. Suddenly all bets were off on what the future would bring. Yet forecasting the unforecastable is an economist's job, and Mark has endeavored to project both short-term and long-term outcomes to help readers of The RMA Journal chart the courses of their institutions.

MHH: Prior to September 11, this interview was intended to probe the possibilities of recession, economic issues that bankers should be cognizant of and any recommendations you might have of steps to take to circumvent recession. So much has changed since September 11, and so much more will change in the immediate weeks following the event.

MMZ: The negative impact will be widespread. There's not only the direct impact of September 11 to deal with, but the ripple effects as well. The disruption to the economy has been very significant and has resulted in the loss of hundreds of thousands of jobs at a time when the U.S. already was seeing scattered layoffs rising among certain industries. Confidence has eroded considerably--more than I thought it would--and this is reflected in the equities market. A bunker mentality is setting in as consumers and businesses are curtailing spending and investment. A week after the attack, I still had hoped that a fair amount of the economic damage would be offset by government intervention and rate reductions, the tax rebate, and spending programs. At that point, I didn't see unemployment moving beyond 5.5%. But now with the additional erosion of confidence, we are no longer skirting recession. We are in recession. Depending on how things unfold militarily, the recession could last at least through the beginning of 2002 and we are now looking at a jobless rate of 6-6.5% by next summer.

The impact on the airline industry extends to those firms that produce aircraft and other supplies used by the airlines. Financial services institutions are feeling the stock market hit, especially in the investment banking areas as well as most sectors of the property/casualty insurance sector. The loss of those jobs will be very significant and household lenders will see much weaker credit conditions as well as less demand for credit. Retailers will suffer through a very soft Christmas, in which dollar sales could fall from last Christmas for the first time since the Christmas during the Korean War. So the aftermath of September 11 will affect everyone in the U.S., and worldwide, regardless of proximity to New York City.

Some regional economies, of course, will suffer more than others. Those that are travel dependent are being significantly affected, such as Las Vegas, Orlando, and Hawaii. Regions that rely on the airline industry or have large hub airports are being affected, such as Atlanta, Dallas, Denver, Seattle, or Salt Lake City And we don't know yet what will happen with the Olympics scheduled to take place in Salt Lake City. While agricultural regions are not as likely to be affected, we don't know yet the possible impact on exporting agricultural products.

MHH: What about U.S. international trade partners?

MMZ: Canada and Mexico will certainly be affected because of disruptions to border traffic. Countries with shaky finances and large external debt exposure, such as Argentina and Brazil, are seeing the risk premium on their financing costs rise significantly. Global trade in general will be lower because of September 11.

MHH: Can you envision a significant increase in defense spending that could benefit the aircraft and related industries?

MMZ: Raytheon, General Dynamics, and other defense contractors should do well, as should a number of smaller industries. Everything from textile companies that sell uniforms to software companies will feel a positive effect. Right now, however, we're talking about $20 billion for additional defense spending, which will not go all that far. I must get back to the fact that there is not enough out there in the way of up ticks to overcome the overall negatives that are unfolding. The only thing that will turn this around is consumer, business, and investor confidence. Until that is restored or at least stabilized, government spending cannot help enough to make a real difference.

MHH: The Big Three automakers went to the Secretary of Transportation in September, seeking help in stimulating car sales. What's your reading on this?

MMZ: GM's zero-percent financing is a good indicator of how stressed they are. The auto industry is clearly in trouble, as are steel, fabricated metals, chemicals used for auto paints, and other auxiliary industries. They all got nailed when auto sales went from 18 million units early in 2000 to 15.9 million units as of September 2001. And forecasts are for auto sales to remain well below 16 million units. This will prompt another round of layoffs and other adjustments. So jawboning can do only so much.