Did you ever feel like things were so bad that there was nowhere they could go but up? If so, you were a proponent of a personal so-called “basement thesis,” and now a top economist is applying that same logic to the global economy. According to BNY Mellon Chief Economist Richard B. Hoey, many key cyclical sectors are still depressed and appear more likely to rise than fall. In his October 2011 economic update, he called this a basement thesis that applies not only to the car market, but also to capital spending and housing.
In sharp contrast to the typical pre-recession condition, which analysts who are fearful of a double dip are concerned about currently, auto sales have recovered only from the sub-basement to the basement. Hoey believes that because of this, vulnerability to a substantial decline -- a major slip in auto sales, for example -- is limited. For the consumer, that means that now may very well be a better time to buy a car than after the first of the year.
“We believe that U.S. auto sales are more likely to rise than fall,” says Hoey. “A similar basement thesis applies to other cyclical categories, notably capital spending. Housing is a special case, still stalled at a sub-basement level, with residential investment as a share of GDP now severely depressed.”
Looking at the global economy, Hoey believes that the outlook for the global economy depends crucially on the severity and duration of European financial stresses. That will be a key determinant of the fortunes of the European car companies.
“We expect neither a disorderly financial meltdown nor a clean, orderly resolution of these stresses,” says Hoey. “Given the slow speed of European decision-making by various policymakers, we expect a semi-orderly stop-and-go process, which averts the worst-case outcome but reduces European financial stresses only gradually over time.”
