Corporate profits
Interview: JP Morgan Securities---Glassman, James---Economist (slow)
>> Welcome back. a survey finds economists expecting a 2.6% growth for the u.s. this year. that would be 3/10 of a point better than last year. the 54 economists polled by blue chip indicators expect the nation’s output of goods and services to expand at a 4.5% rate this quarter fueled by a burst of consumer spending. 3.9% is the consensus forecast for the final three months of the year. and it is 3.9% again for all of next year. that would be the biggest gain since 1999. well, speaking of the economy, economists and investors will have plenty of economic data to sort through this week. among the reports out, the weekly jobless claims and august retail sales. joining us now with a preview is senior economist at j.p. morgan, james glassman, and he joins us live from their offices in new york city. thanks for being on the program.
>> good afternoon.
>> you and your colleague john lip ski have he emphasized corporate profits as a key to the turnaround of the economic recovery as well as the markets. tell us the signs you are seeing in terms of corporate profits. does it look like a rebound there?
>> all year long companies have been surprising people on the upside and the profits numbers have been coming in much better than people expected. i think what we are learning is that corporate america has done a pretty good job getting profits back in line. we are seeing profit margins return to normal levels. and the economy hasn’t really picked up yet. it usually takes strong recovery to help get that to happen. so we are learning that companies have done a pretty good job behind the scenes fixing things. what that means to us is that more of the benefits from good growth, productivity are going to start to go through to labor also. so i think what it’s telling you is―and look for some pretty good profits performance in the quarters ahead as the economy picks up steam. because we are getting this performance and we really haven’t had much grothd yet. but now we are all pretty optimistic that growth will speed up to double the pace we have been seeing, 4% to 6% growth is a reasonable range that most of us are sort of gravitating to for the second half of this year looking into next year. think it’s going to bring pretty good profit performance and good wage income, and finally probably by thanksgiving some new employment.
>> speaking of employment, we saw initial jobless claims last week up again. it had been below that 400,000 mark for five out of six weeks in a row until last week, when it jumped up again to 413,000. when will this―you said by thanksgiving we’ll see a change. quantify that, if you would.
>> we are not expecting much from jobless claims tomorrow. here is the thing. if you look at where the economy has been to date, we really have only grown 2.5% or so, as you pointed out, in the last four quarters. what we are finding out is that until the economy starts growing faster than 3% you wouldn’t expect much employment. companies are so productive they can produce 3% g.d.p. growth without having to hire. now, if the economy starts speeding up, it takes a few months before good growth translates into hiring. i mean it takes companies a while to figure out what they need and then go out and find folks. so i think maybe when we see sometime in october, november, we are going to see temporary help going up. we are probably going to see jobless claims coming down this fall. i would hope that we are going to see the jobless claims trend drifting to the 370,000, 380,000 range. that will be a sign things are moving. it’s the labor market data is the last thing, we’ve really not seen much going on in the job market yet. that’s the one thing we’ve got yet to see. we are seeing a lot of good news on the business side. capital spending is picking up, consumer spending, a whole string of things are doing better.
>> can we infer that your optimism on the economic growth front means that the fed should consider raising rates any time soon? would that be a good move and is inflation on the horizon?
>> i don’t think inflation is on the horizon. i think they are going to sit it out until they’ve got a real strong period of growth. i think they are looking themselves for 4% to 5% growth. they are willing to let the economy grow at an above-trend pace for a little while, before they consider raising interest ratess because there is so much excess capacity. unemployment is well above where they think full employment is. so it takes a lot of growth to get things, the economy back closer to full employment when they start thinking about raising interest rates.
>> take us into 2004, many economists calling for 2003 growth to be the stimulus that you described and many others have talked about in the economy. but will that per dane to 2004 as well?
>> i think so. i think it becomes self-sustaining as we go into next year, because we’ve got low rates that are going to be helping and providing, the fed’s interest rates are going to provide ongoing fiscal stimulus. the fiscal stimulus is providing several rounds of kick that will go into next year. we’ve got a global economy reviving and new optimism rebuilding. we’ll get the kind of growth in the second half of the year that will create new job growth, new income. this thing will turn into this classic, cyclical revival where good growth, good demandslates into new job growth, which translates into new income, new spending, and it becomes self-reinforcing.
>> take us through some risks, things that could derail a recovery, higher interest rates, higher energy prices, geopolitical events. what would be first on your radar of concerns?
>> you know, i don’t have too many concerns frankly, because if interest rates go up it’s going to be because the economy is getting stronger. i think interest rates are kind of the tail of the dog. if the economy is strengthening, then industry rates are rising. because of that i wouldn’t worry much about interest rates derailing anything. geopolitical, you always got to respect the possibility that we are living in a more dangerous world. things can happen. but i don’t think we’ve got a lot to worry about.
>> james glassman, senior economist at j.p. morgan. thanks for joining us.
