Posted on: Sunday, March 10, 2002

State of economy draws split opinions

By George Hager
and Del Jones
USA Today

Most economists say the recession — if that's what it was — is over. A growing minority even insists the rebound could be a lot better than expected. Not likely, say business CEOs, who complain that economists don't always live in the real world, and if they did, they'd see that things aren't nearly so rosy.

Why the huge disconnect between economists and CEOs?

"Maybe the economists are looking at leading indicators — I'm looking at actual business," says Kelyn Brannon-Ahn, CEO of Movie Magic Technologies, a software and database company. "I don't believe we've turned the corner."

Brannon-Ahn isn't alone. A late February survey of CEOs by the Business Council found 75 percent saying the economy remains stuck in recession, while 77 percent expect that even after a slow-motion rebound later this year, the economy won't do much better than the dismal growth it posted in 2001.

In Hawai'i, a survey by the Business Banking Council last month of more than 400 local businesses showed nearly half of the companies said they now have lower profits and revenues, and fewer employees than they did a year ago. And most predict the economy will remain the same or get worse in 2002.

Surveys of economists, on the other hand, sound as if they're describing a different planet. Just a week before the Business Council poll, the National Association for Business Economics reported that a poll of its members gave 60 percent odds that the recession was already over. That number would probably climb if the survey were held again today, after a surge of better-than-expected numbers on car sales, consumer spending, housing and business activity.

Judging from the data, economists are dead on — almost every new number seems to exceed expectations. That includes surveys that track the factory sector, which took the worst hit in the downturn and is now accelerating out of the slump, propelled by rebounding orders and rising production.

But even economists concede that they live in a different world than CEOs, with different incentives, a different psychology, different numbers and a different view.

"We don't do a good enough job of explaining what it means for a recession to be over," says Mark Vitner, an economist for Wachovia Securities. "It's not like somebody just flipped a switch and the economy's back to normal. ... It's as if you've just been through an ice storm, and suddenly the sun comes out and the temperature hits 33 degrees. "It's still pretty darn cold."

Both sides say there are real reasons for their differences. Here are some:

• Underestimating the stimulus. Mickey Levy, chief economist for Bank of America Securities, says even many fellow economists consistently underestimate the slow-acting but enormously powerful force of the Federal Reserve's interest rate cuts — and the Fed cut rates a hyper-aggressive 11 times last year. Lower taxes and lower energy prices just add to the wallop, Levy says.

While CEO pessimism could be a self-fulfilling prophecy, keeping hiring and investment low, Levy doesn't see it happening that way. "The recovery is beginning in a very typical fashion," he says. First, there's "strength in consumption and housing, then businesses have to respond."

• Overestimating the effect of Sept. 11. September's terrorist attacks rocked the economy hard enough to turn what many economists think would have been slight growth in the July-September third quarter into the first contraction in 10 years. Nervous businesses reacted with huge layoffs and a big pullback from new investments and expansion plans — even after the economy showed surprising resilience and growth in the fourth quarter.

Economist Glenn Hubbard, chairman of the Bush administration's Council of Economic Advisers, says he usually trusts CEO instincts because they bet with real money. But this time, he says, they have overreacted to Sept. 11 and are excessively pessimistic.

• Penalties for mistakes. Economists are rarely penalized for erroneous forecasts, but CEOs can pay with their jobs, or the jobs of people they hire and have to lay off if things go bad.

"Unlike economists, there are consequences for executives getting it wrong," says Betsy Bernard, president and CEO of AT&T's consumer business. "I don't know if executives are behind the curve, but they are probably more cautious."

Says Michael Capellas, CEO of Compaq, "We all know (the rebound) is coming, but the difference between an economist and a CEO is that we have to know exactly when. I don't know exactly when, so I'm more conservative. The hard data are not there."