ATLANTA – The current business fundamentals in the American economy "make a good argument" for solid economic growth in 2003, Smith Barney Managing Director John Manley told an audience of corporate real estate executives in Atlanta on Jan. 9.

Smith Barney Managing Director John Manley (pictured) is a seven-time member of the Institutional Investor's All-American Research Team.

        "We don't see great growth for the next five years, but the fact is that current business trends in this country argue for a return to times of economic growth," Manley told a gathering of some 500 executives at the combined meeting of CoreNet Global and Commercial Real Estate Women of Atlanta. "As the economy begins to recover, the Federal Reserve Board will raise interest rates, but not right away."
        Despite recent poor U.S. job reports, Manley said that the key statistic to consider is the percentage of upwardly revised corporate earnings reports. For December, the 24-year Wall Street veteran noted, upward revisions of company earnings were 8 percent above normal – and 60 percent above normal for technology firms – a harbinger of an economic recovery.
        "One thing we must remember is that we just had a superficial recession," Manley said. "It was a capital goods recession. This one was not planned. But the Fed has been doing everything it can to avoid the destruction of American wealth. The consumer, as a result, has remained relatively healthy."

Tax-Cut Stimulus Will Aid Recovery

This paradox – lower capital spending by companies but continued robust spending by consumers – contributed to the recession of 2001 and 2002, but is likely to end once President Bush's economic stimulus package takes hold, Manley said.
        "Personally, I support the President's tax-cut stimulus," the economist said. "For one thing, the U.S. should run more of a deficit until its economy becomes healthy again."
        On specific economic issues, Manley offered the following advice and predictions:
        • Yield will be a commodity in very scarce supply over the next five to 10 years because there will be a much greater demand for yield from investors – particularly from the Baby Boom generation that turned 57 years old in 2002.
        • Business fundamentals are improving, and even mores as Wall Street begins to think that war with Iraq may not be inevitable.
        • American corporations have been replacing technology, not adding to it. As a result, this has kept overall technology spending down.
        • Inflation will be minimal during the recovery, Manley predicted. "I don't think that inflation will pick up dramatically during this recovery," he said. "In fact, too much stimulus is better than too much restraint. The Fed can live with some inflation. It's deflation that they want to avoid."
        • Stocks are still more attractive than bonds on a one- or two-year basis.
        • Health care and pharmaceuticals is a good sector to invest in right now, especially over the next nine to 12 months. Industries to avoid are retail companies and airlines.
        • Since municipal bond yields are already pretty high, they probably will not be hurt by a dividend tax cut.
        • Commercial real estate will not recover until companies start hiring again. "Real estate always follows employment," said Manley.