Economy's Got to Roll Up Its Sleeves

Stipp: Sure. Also, on the retail front, a lot of folks are still worried about the state of the consumer. Unemployment is still high. Have you gotten a little bit more pessimistic on retail? What's your take on how that's going to play out?

Johnson: Retail is the absolute key thing to watch. It's the wild card here. It's the time of year when the housing and the auto numbers mean a little less, and the retail numbers are really the focus. I don't want to get too carried away, but I look at a series of weekly retail sales numbers, and we've had a couple of slower weeks right here in front of the holiday season.

That could easily flip around, but right now those look a little worse than they did, say, four weeks ago.

Stipp: So do you think that slowdown bodes poorly for the upcoming Christmas season that's so crucial to a lot of retailers?

Johnson: Well, it's a little hard to tell because people always like to last-minute shop, so one set of numbers doesn't necessarily mean anything. You have to take each number as it comes, so to speak.

The retail sector is going to be really up for grabs this holiday. I think some of the high end of the market on retail could do a little better than people are expecting. The stock market's up about 65% from its bottom way back in March, so people can take a few profits and spend a little money on holiday gifts.

I think some of the bonus money out of some of the financial institutions--anybody that's involved with markets--may be a little better. Some people may have mentally penciled in zero for the bonus, and I think things are going to be a lot better than that.

So those two things could mean the high end of the market at the holidays does just a little bit better.

Stipp: OK. We'll certainly knock on wood for that hopefully. Also on the production front it seems that we maybe haven't made as quick a progress recently as we could have. What's your take on where we are with production, and is there more upside from here?

Johnson: Sure. I think there's upside, but I think we've gotten a lot of the low-hanging fruit. Bear with me for just a minute for some numbers, Jason, just in terms of automobiles is a great example.

At the peak, we might have been doing 18 million automobiles. That number in terms of sales dropped to 9 million, while production dropped all the way to 6 million. So what's happened the last six months is we've moved auto production from 6 million to 9 million units, a 50% growth level. That's been a great boom for the economy.

Now production equals sales, and now we need the sales number to go up. The sales number is still at a near-record low, so it's got a lot of room to expand. Everybody's expecting 10%, 15%, 20% growth in auto sales next year, so if everything goes as planned, we'll do fine. But the easy 6 million production units to 9 million, that's over.

Stipp: Easy growth is done, so from here we'll have to roll up our sleeves a little bit as an economy, and start to see some perhaps more real growth coming out instead of just that production mismatch that we were seeing before.

Johnson: Correct. Exactly.

Stipp: OK. Another issue is the stimulus issue. It seems on a lot of fronts the government has been moving very slowly. There's all sorts of legislation that's going on right now with health care, other diversions. Is stimulus off track? Are we going to see some benefit from stimulus anytime soon?

Johnson: You know, I keep hoping we do, but that is one of the factors in my fourth quarter analysis that makes me a little bit more negative on GDP is the stimulus money.

There have been a number of tactical errors here. They put the program in place back last winter, and did it set-it-and-forget-it. I think the forget-it part of it's coming into focus right now.

I think what happened is a lot of the stimulus money was targeted at highway programs. All of that money was meant to go on top of the normal highway budget.

Well, the five-year master highway plan ran out a couple of months ago, and they failed to extend that program on any kind of permanent basis. So spending on roads, and highways and whatever is actually down from where it should be. Where we thought that would be a big help in the fourth quarter, it's now, well, we don't know because nobody knows what the spending bill is.

Now I'm sure they'll try to fix it over the next couple of weeks and get it right, and it will be a nice help for 2010, but it's still not going to help us this December, which is hence one of the reasons I'm negative.

I think there are some other things in there too on the government side that's negative. They extended the unemployment benefits, but they made some tactical errors about--well, they did it off a bill, but that bill expired, so now they have to go back and do joint votes in both houses of Congress to fix it. Now they've got health care on their thing, and everybody wants to load up the bill with different other things. So it's created a mess.

Stipp: Some snafus and technical issues have held that stimulus money back for a while, so we may not be seeing it as soon as you'd previously thought.

Johnson: Correct.

Stipp: OK. Maybe a little bit of the hard part here. How much did your opinion change and your forecast change for the near term? What numbers were you looking at before, and what are you thinking now?

Johnson: Sure. We had one number we thought we had already out, the GDP number for the third quarter, that is the period ending in September, and we were thinking the reported number for the first run was 3.5%.

We get the next revision of that number next week, and now it looks like that number will be somewhere between 2.5% and 3%. I was pretty solid at the 3.5%.

We've got some inventory numbers, some retail sales revisions, and now it looks like the number will probably be, if I had to pick a single point number, 2.75% for that. That's a reduction there.

I've been thinking 3.5% for the fourth quarter, pretty much in line with where we previously were in the third. Now I'm thinking that number may look more like 3%, 3.25%.

Stipp: OK. Last question for you. Is this recovery delayed, or is this recovery permanently stalled? What's your longer term take here? Are we just a few bumps in the road, or do we really need to start worrying about sustainability of the recovery?

Johnson: I think the auto levels of sales and the housing level of sales are so far below natural demand, I think that we're there. We're going to get there a little slower than I may have thought, so that's the biggest change in the forecast.

I'm still at 3.5% growth in GDP for next year, which is still well ahead of consensus.

Stipp: OK. Well, thanks so much for joining me, and for your insights and your latest thinking, Bob.

Johnson: Great. Great to be here.

Stipp: For Morningstar.com, I'm Jason Stipp. Thanks for watching.