Those of us old enough to remember Studebakers and the military-industrial complex will recall the Eisenhower Recession, which began in 1957, lasted eight months and was followed by the 10 month “Rolling Adjustment” recession beginning in 1961. The W-shaped path of the US economy during this period is the correct analogy to today’s crisis, according to Loomis Sayles and Company’s Dan Fuss.
Fuss is one of the industry’s preeminent bond investors and was the keynote speaker at New England Pension Consultants’ client conference on May 21.
Fuss said the crucial impediment to economic growth is the collapse in capital spending, as corporations have cut back their spending plans on everything from software to new plant construction. He forecast a repeat of the W-shaped recovery and a six-year period of slow growth, warning investors that “things are going to be very disappointing.”
Eisenhower’s recession certainly bears similarities to the current downturn. Both were world-wide crises marked by a sharp decline in investment in fixed capital. Eisenhower faced a 31% slowdown in automobile sales in 1957, which is not quite as bad as today’s drop of nearly 50%, and the Rolling Adjustment recession marked the beginning of the shift to buying foreign-made cars – perhaps the first nail in today’s coffin.
Fuss is well aware those recessions were mild by today’s standards – GDP declines of 3.3% and 2.4% and unemployment of 6.2% and 6.9%, respectively. He called the current inventory contraction “horrifying” and, although this correction may be complete, he said the impact on capital goods spending is a “long way from over.”
The four P’s
At a macro level, Fuss was somewhat more optimistic. “No matter when or which market you analyze, four key themes guide the future,” he said. Those themes are peace, people, politics, and prosperity, and Fuss offered his views on each.
“Peace is the most important factor, and we don’t have it,” Fuss said. Wars in Iraq and Afghanistan will cost the government about 2% of GDP, which he called a “serviceable” amount, similar the outlays for conflicts other than the World Wars, the Korean War, and the Vietnam War. Longer term, however, Fuss’ fears lies in the impact this 2% will have on the Treasury’s debt burden.
