winter-spring 2001


GSB in Brief

Being There: Business Forecast Luncheon

Who’s News


class notes

Robert Z. Aliber

Joel M. Stern, ’64

Marvin Zonis

Being There: Business Forecast Luncheon
Economic Downturn Predicted for 2001

After the economic boom of the late 1990s, the outlook for 2001 seems less than promising. But are the predictions by Robert Z. Aliber, Joel M. Stern, ’64, and Marvin Zonis entirely hopeless? Nearly 2,000 Chicago GSB alumni and professionals from every industry gathered at the Fairmont Hotel in Chicago last December to find out.

“What makes the year 2001 very different from any previous year in U.S. financial history is that the negative wealth effect will be much larger,” said Aliber, professor of international economics and finance at the GSB. He associated this negative wealth effect with a nearly 20 percent decrease in stock prices that, in turn, has resulted in a decline in the expansion of household spending and a slowdown in investment spending.

During the remarkable economic expansion of the second half of the 1990s, a positive wealth effect led to greater spending by households and firms because of a decline in the cost of capital. “Now the model is operating in reverse,” said Aliber. “The economy is hitting the wall.”

The economic outlook is particularly unpleasant for industry, according to Aliber, who predicted more bankruptcies this year than last. Almost all movie theater chains are bankrupt, subprime lenders are in distress, and automobile sales have declined, he said. As a result, “anticipated growth of corporate earnings––which had been in the range of 12 to 15 percent a year––is being revised downward.”

While Aliber acknowledged the possibility of a fourth-quarter recession, Stern, managing partner and CEO of Stern Stewart & Company, said the economic consequences for 2001 would be less severe. At most, he predicted stagflation caused by high interest rates and slow growth, particularly in the first half of 2001.

“I expect real growth will be 2.5 percent but with weaker growth in the first half, perhaps as low as 1 percent annualized,” said Stern. According to Stern, the reason for weakened share markets and an economic slowdown is that the monetary base––so-called “high-powered money”––grew only about 1.5 percent in 2000, while during the previous three years, the growth rate was more than 6 percent.

Fortunately, the drop in the growth rate was not more dramatic. “Had growth been cut even more abruptly, we would be experiencing an extremely hard landing about now, perhaps even a recession,” said Stern, who said he believes the slowdown will be brief and that markets will head upward in the second half of 2001.

He also said he believes in a strong stock market. “It wouldn’t surprise me if the NASDAQ was close to 6,000 in the future,” Stern said, though he added that “it will take us a few years to get it back to where it was.”

Zonis, professor of business administration at the GSB, also tried to sow some hope amid low expectations. With the close outcome of the U.S. presidential election and the certainty of continued congressional partisanship, he predicted that “a widespread sense of betrayal and loss will permeate U.S. politics for the entire term” of President Bush. But he reminded luncheon guests that the United States “does not face a crippled president, only a weak one.” The Bush White House will bring a competent circle of advisers and foreign policy specialists, Zonis said.

He also felt “uncharacteristically upbeat” about the economic future of both China and Europe. China, for which electronics represent only 22 percent of its total exports, will suffer less than all other Asian states as American and European electronics imports slow, said Zonis. Europe, meanwhile, will close the gap between the United States’ economic growth and its own, while “the Euro will strengthen and the technologization of the European Union economies will accelerate.”

But the greatest challenge to global economics and politics, according to Zonis, will be the disparity between countries that have adopted democratic and market reforms and those that remain steeped in corruption. “We are on a two-track world,” he said. “Failure to address the divide will result in increased poverty for the failing countries, increased global instability, disease, population movements, and conflict.”––A.R.

2001 Forecast

Real GDP
Aliber: +1.8%
Stern: +2.5%

General Price Level (IPD level)
Aliber: +3.3%
Stern: +2.8%

Nominal GDP
Aliber: +5.2%
Stern: +5.4%

Real Consumer Spending
Aliber: +2.2%
Stern: +1.3%

Real Business Spending
Aliber: -1.9%
Stern: +1.7%

Real Government Spending
Aliber: +1.5%
Stern: +4.1%

Real Net Exports
Aliber: -10.5%
Stern: -16.6%

Unemployment (year’s average level)
Aliber: 5.1%
Stern: 4.4%

Real Corporate Profits (after taxes)
Aliber: -10.9%
Stern: +4.0%

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