A significant acceleration in the economy
Interview: Lord Abbett.---Milton Ezrahi---Senior Economic Strategist
>> Welcome back. warren buffett’s berkshire hathaway acquired bonds and preferred shares of nextel communications this year. state regulatory filing show four of burkeshire’s insurance units spent $468 million to acquire securities with a face value of about $506 million. bust has been on a $7 billion buying spree for below investment grade debt since last year. nextel fits that category. this company is adding subscribers and boosting customer sales at a faster clip than its competitors. bellsouth’s plans to expand in the long distance market by acquiring former parent at&t may be disconnected. people familiar with the matter say bellsouth is balking at the price at&t has demanded. people say at&t has demanded as much as 26 a share, about 20% more than its market value here. according to these people who spoke on condition of anonymity, bellsouth has refused, saying at&t is worth little or no premium. failure to agree to a sale may leave at&t without a suitor as it faces a fourth straight year of falling sales in 2003. one of the people said bellsouth might pursue other targets including worldcom which will change its name to mci. the number two long distance company plans to emerge from chapter 11 bankrupt in october. our next guest takes a big-picture look at the economy in the markets. he says recent economic data confirms a significant acceleration in the economy for the second half of the year. milton ezrahi at lord abbett joining us in our studio.
>> pleasure to be here.
>> economic numbers today, the markets, although those that were active in the markets today reacted positively to it. though we had light volume we saw a situation where the markets rose on the news. first of all, what was the most important piece of economic data we got?
>> i think the most current number we have is the chicago purchasing managers. that came in above expectations. it’s an indicator that when we get the national number next week if it’s going to surprise it will surprise on the high side. that is the most forward looking number. that has encouraged the market though there were not a lot of people on wall street to trade today.
>> the chicago purchasing manager number, as you said, ahead of the napm or i.s.m. as it’s called now, are very important. we have up on the bloomberg now a chart going back to 1997 of the chicago purchasing managers. clearly right here in 2001 it took quite a hit as we moved into recession. things have moved up since then. now it has the potential in the next report perhaps to rise above the most recent benchmarks going back to 2000 levels. do you have an expectation that will continue?
>> we do. we think this economy is gaining momentum in the third quarter, fourth quarter into 2004, and we should see a lot of the statistics we look at recapture their former highs, just as this one probably will.
>> now, you expect the economy to continue to pick up, so along with economic numbers we’ll see through the end of the year, do you expect the markets to follow?
>> i think equities and equity like product in the bond market should follow. we are seeing earnings numbers, we got an indication earlier this week that the earnings for the second quarter and the g.d.p. was strong. we had already seen that on the s&p numbers the we should probably get that confirmed again as we move through this quarter and into the fourth quarter, and the market should follow the earnings, yes.
>> any concern about consumer sentiment here? we saw a number that was revised downward.
>> it was revised downward. i think the consumer sentiment number we saw was a little bit of a chagrin because the bond market had rallied and it gave back more so, in august we saw a rise in yields and i think it upset the consumer. there was a lot of talk about the yields hurting the economy. that upset the consumer. we can see from these numbers it did not hurt the economy and the consumer should follow suit.
>> what’s your sense of the consumer right now, as far as their local economy, very local economy is concerned, their individual economy? i was talking to david tice, prudent bear yesterday, and he was saying watch out. the consumer is completely overleveraged between refinancing and issues of buying vehicles that they are financing over five years with zero percent financing that ultimately they won’t beble to afford if they lose their jobs. do you think the consumer faces more trouble than they did?
>> i think the customer’s financess are not in as good a shape as they were years ago. there is a great deal of debt. but if you look at balance sheets and the growth of income, the consumer looks like he is capable of sustaining enough spepding growth to help the economy move forward, ultimately though it will be sometime, we’ll see the jobs growth and that will reinforce the pattern.
>> let’s get into your view on the jobs growth. you expect the economy to continue to rebound. we may not see that in the employment numbers. we have employment numbers due out next week for the month of august.
>> i think the issue here is that there is a dark side to the productivity growth. that has relieved employers of any need to hire new workers, even as volumes have increased here very nicely since late last year. actually since early 2002. so even though these volumes have come up, the employers have been able to get by with the existing workforce, and it’s unlikely that they are going to start hiring any time soon. we’d be surprised to see jobs growth before the end of the year.
>> what do you expect for a number in the next employment report?
>> we think the unemployment rate will probably rise above the 6.2, in part because there won’t be any new jobs and also because the economy is improving a lot of people who had given up will probably come back into the marketplace and that will raise the unemployment number, too.
>> milton ezrahi, senior economic strategist at lord abbett and company. so as we head into the labor day weekend we close on some strong economic reports.but the u.s. is still not creating jobs, with the unemployment rate near its nine-year high.
