Summary:The discussion this year focused primarily on the distinctions between today′s economic environment and that of the early 1990′s. While the current administration′s stimulus package — including elimination of the double taxation on dividends — is certain to have a positive impact on U.S. equity markets, the panel agreed that an economic recovery will be slow in coming. The geopolitical risks related to the war and the continuing efforts to thwart terrorism globally, coupled with rising oil prices and an increasing budget deficit, could easily wipe out the benefits of any tax cuts that investors anticipate will help pull the U.S. economy out of recession. Suzanne Nora Johnson summed up this sentiment by stating that investors "should not be lulled into the thinking the economy will recover quickly even after the war is over."
The common view stressed throughout the discussion was that the war is not the only headwind facing the economy. Glenn Hubbard and Joseph Neubauer emphasized that business leaders need to continue training and retraining "knowledge workers" in order for the U.S. to retain its economic leadership position. They pointed out that to promote continuing flexibility in the U.S. economy, business leaders must be given incentives to invest in people and in equipment. Hubbard argued that the removal of the dividend tax is a positive step in the direction of effective incentives because it "promotes flexibility in the economy…and allows for business decisions to be driven by business issues rather than the tax code."
Several panelists also pointed to the overall effect globalization continues to have on the U.S. economy, including resource allocation and pricing issues. In addition to trade imbalance issues, the growing budget deficit remains a very real threat to an economic recovery. In her comments regarding the distinction between past structural and cyclical bear markets, Ms. Johnson reminded the audience that a significant increase in oil prices could result in the shrinking of the GDP by as much as 1 percent.
Overall, the panel suggested that there is still significant room for a downward setting of expectations for quick economic recovery in late 2003. Diane Swonk went as far as to predict that the latter half of this year would see measured improvement in leading economic indicators, with a fuller recovery not likely until 2004. She was, however, optimistic about the momentum currently being observed in the data reflecting increased equipment spending, improved liquidity in the small business market along with notable improvements in consumers′ access to credit. In short, the panelists agreed that the dividend tax cuts, coupled with an additional 50 basis point reduction in the Federal Funds rate, should serve as effective stimuli to keep consumers and corporations spending at increasing levels and refinancing debt opportunistically.
While the topic of the rate of the U.S. economic recovery permeated most of the discussion this year, panelists also touched on the issue of corporate governance. Sharon Allen highlighted several positive features of the newly enacted Sarbanes-Oxley legislation including attempts to improve transparency between corporate executives and investors. The general sentiment among the panelists, however, was that rules do not necessarily change behavior. Neubauer took his own experiences as a CEO and as a board member on several other corporate boards to stress that legislators could be more effective in reducing fiduciary misconduct by increasing the SEC budget for enforcement efforts. Several others added that the standardization of internal control systems is not only expensive to develop, but also extremely difficult to implement given the differences between manufacturing and service businesses operating in a global context. Finally, one panelist reminded the audience that most of the disclosure requirements set by the new legislation have always been available in SEC filings made by corporations. He intimated that investors (both large and small) have a responsibility to review such information, rather than cry fowl when bad news comes out of the corporate boardrooms.
In summing up the remarks of the panel, Steve Forbes remarked that the elimination of the double taxation on dividends would be one of several positive drivers of an economic recovery. While the current recession is very different from that of 1991, the overall sentiment expressed throughout the discussion was that consumers are in much better shape today relative to the same period in the earlier downturn. The clear consensus among the group was that spending required on the continuing war on terrorism could very well be the U.S. economy′s Achilles heel. If the U.S. government can be effective in getting other countries to share in that burden going forward, the last and most critical component of a full U.S. recovery will be the return of a more nimble and outperforming equity market.
