5 reasons to worry
An economic recovery is not a sure thing just yet.
February 27, 2002: 9:11 a.m. ET
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NEW YORK (CNN/Money) - Before you put the lampshade on your head, do the shimmyshake and start singing "Happy Days are Here Again," sit down, splash your face with cold water, and sober up. There are at least five reasons any recovery will be at best muted and at worst, nonexistent.
Reason Number One: Improved first-quarter earnings will mean diddle.
Sure, we have a lot of companies coming out now saying they are going to meet or beat expectations. But come numbers time, no one is going to focus, much less believe, any improved earnings reports for the first quarter - thanks to the Enron fallout. Instead, the investing public will be focusing on how companies arrived at those numbers.
Which means companies will be coming clean. So the footnotes and explanations accompanying the first-quarter profit numbers, plus all the annual paperwork that Corporate America will have to file with the SEC before March 31 will get more attention than the final numbers. Odds are that a fair number of companies will be flagellated, even if they had good bottom line numbers. So the generally improved earnings picture won't appear.
Reason Number Two: Money bags will tighten.
Sure, money is cheap right now, thanks to the Fed. But that doesn't mean banks and financial institutions want to throw it away. Nevertheless, several money houses did throw it to Enron in the form of revolving credit lines. That hurt. That pain came at a tender time -- after the Internet Bubble, which also burnt up lent money.
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So banks are going to look extra hard - extra special hard, really - at anybody looking to get a loan. This could include existing businesses looking to buy new machines to improve widget building or new ventures looking to get into the widget building business.
Many loans are likely to get turned down. That may be wise in some cases, but on a general level it will mean less economic expansion.
Reason Number Three: Bonds ... Time's up, pay me.
During the Internet Bubble, many companies issued convertible bonds - bonds that could be cashed in for stock after a certain time. It seemed like a good idea at the time. You sell the bond, get the money. You don't think you'll ever have to pay the money back, because lenders will just trade in the bond later for stock - your ever-increasing, no-market-downturn-in-sight stock.
Well, those bonds are coming due, and guess what? The market turned down and nobody wants stock. They want the cash. About $14.5 billion in convertible bond payments is coming due over the next year, according to Morgan Stanley Dean Witter.
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Now that's just a drop in the bucket compared with the total debt market. Still, it may be enough to put some companies into tight corners. And these days a few well-known names in tight corners is enough to cause some nasty knock-on effects.
Nothing like a bunch of debt-due to siphon off money that could be going into production.
Reason Number Four: Still no jobs.
So let's say there is some fringe uptick in business activity. Will hiring begin to pick up, adding to the consumer buying pool and feeding economic activity?
No. If there is a move toward recovery, it will be a jobless one. Why? Because American business is getting better at doing more with less. Productivity improved in 2001 by 1.8 percent. The U.S. labor force naturally grows by about 1 percent a year (lots of college kids and Gen Y-ers coming on line, you know). So, growth would need to be more than 2.8 percent to absorb both the new workers and outstrip productivity improvements.
So if you were hoping for a trickle of rehiring that would gradually turn into a steady of drop in unemployment, you'll have to wait a while for a real jumpstart.
Reason Number Five: Housing ... Bubble anyone?
Remember the old saying, "If it walks like a duck and quacks like a duck ... it probably is a duck."
Well, sales in the housing sector have been rising dramatically, thanks to low interest rates. When selling gets hot, prices get high - higher than they should in a given amount of time. A value bubble forms.
As a result home building and selling have been on a tear. Supply will, sooner or later, outstrip demand - especially if interest rates, in anticipation of a recovery, begin to rise. The bubble will burst. Two-thirds of American households own their home and will see the value of their major asset shrink. They'll pull in spending.
That would be a hit on two sources of positive support for the U.S. economy: housing and consumers.
So let's review:
Profit improvements will be discounted by investors;
Money will be hard to come by from lenders;
Corporate America will have lots of bills due;
Unemployment will continue to be high;
A major asset sector will take a hit.
Hmmm ... don't celebrate yet, Pollyanna. 
Allen Wastler is managing editor of CNN/Money
Click here to send mail to Allen the Pessimist
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