Bill Dudley (Goldman Sachs)

Bill Dudley (Goldman Sachs Managing Director of U.S. Economic Research) Was The Final Speaker For the 1999 George Smith Partners Executive Luncheon Series to Benefit the A-T Medical Research Foundation: Don’t expect interest rates to decline. More risk of upward pressure than downward movement. Economic expansion to continue, but at a slower rate. The robust stock market growth should see slowing. Dudley’s comments are summarized as follows: (1) The New Economic Era: Dudley says the U.S. is in a new economic era and the old rules don’t necessarily apply. He refers to it as the "Greater New Business Cycle": (a) U.S. is in the 9^th year of economic expansion with no signs of recession. (b) Productivity remains strong throughout the 90’s after an era of poor productivity lasting from early 70’s to late 80’s. (c) We have had an extended period of low unemployment with low inflation which was once thought to be unsustainable. This relationship has been fostered by rising productivity. Question: Will the economy maintain high productivity during the next slowdown? If the economy slows and productivity growth still stays strong, it will indicate a "secular change in productivity standards". Dudley cautioned that there are limits that the unemployment rate can be pushed down to without putting upward pressure on the prices of goods and services. (2) Why is the economy doing so well? Structural changes in the economy, better information. (a) Inventory Management: "just in time" helps companies respond quickly to demand swings. Production cycle problems (over-production, under-production) are less drastic and shorter lasting. (b) Deregulation: (telecom, airlines, etc.) companies are able to react to market conditions quicker and with greater flexibility. (c) More flexible labor/capital markets. Labor: Growth of temp workers, Capital: investment can be installed much quicker as information speeds up. (3) Good Public Policy: Balanced budget accords (1992: $290 billion deficit, 1999: $110 billion surplus); Greenspan’s 1994 pre-emptive tightening of monetary policy prevented recession; free trade. Policy dangers on the horizon: Tax cuts (which will over stimulate the economy, leading to inflation and increase debt, leading to higher interest rates), Greenspan retirement (he is 73), protectionism. (4) Good Luck: U.S. economy has been lucky, no extended wars have led to less defense spending, more spending on infrastructure, etc. Foreign currency crises have caused the U.S. $ to appreciate and dampened inflation. He cautions: "Keep fingers crossed and hope for good replacements for Rubin and Greenspan." (5) Outlook For The Year 2000: Little inflation (2.5% in 2000 compared to 2.1% in 1999). (a) Y2K: Look for businesses to raise spending as they build up inventory at the end of 1999, then decrease in early 2000. Interest Rates: Fed probably will tighten once more in 1999 and maybe one more time in 2000. Dudley sees bond yields moderating near term, i.e. for the remainder of 1999. Economic Growth: Every year since 1996 the consensus opinions have called for a slowdown; every year the economy keeps growing. "The idea of a growth slowdown, even now is still a forecast rather than a reality". Consumer spending and employment growth remain solid. Housing: Doing well with home sales still rising rapidly at this stage of expansion (a highly unusual phenomenon). Consumer Confidence: riding high after a dip in the Fall of 1998. (6) Major Factor in Expansion: (a) Stock Market: Has created huge increases in wealth (household net worth has increased by $12 trillion since 1994 year end. Even with 2 or 3 cents per dollar of wealth circulated into consumer spending the benefit is significant. Households are saving less as they count on the stock market and home appreciation to increase their "net worth". Forecast: Stock market OK, but less exuberant (5-10% annual growth). (7) Warning Signals: (a) Savings rate is negative; (b) Trade deficit reached $21 billion for May. "That’s fine as long as foreigners want to take our pieces of paper and give us goods and services, but at some point foreigners decide that they don't want to trade IOU's for goods and services, we're going to have a problem in the dollars when they go down a great deal." Imbalances: Watch for risks if imbalances unwind quickly. Inflation danger: the commodity market weaknesses of the past few years cannot be counted on to continue. Good News: Manufacturing capacity is below 80% which is not only below where they are usually at this point in economic expansion but is below their average value. (8) Summation: "So at the end of the day I think its going to be a pretty good environment, maybe not quite as good as what we've experienced over the last year, but still plenty good for business and one that should be a comfortable one with the exception of the Y2K uncertainty over the next six to twelve months." (The 1999 Executive Luncheon Series had 105 corporate subscriptions. Private briefings were given by (1) Steve Kantor, DLJ’s Managing Real Estate Director, (2) Kathleen Connell, State of California Controller, (3) Stanley Ross, Vice Chairman and Managing Partner of E&Y Kenneth Leventhal, and (4) William Dudley. The program fosters networking among senior industry executives. Participants also receive a table for 10 at the Nov. 3^rd Annual Luncheon.)