There is hope for recovery in 2003, but only if companies step up and start reinvesting.

Business investment has sagged from $69 million in early 2000 to around $57 billion at end of 2002, and consumer ability to prop up what it can of the economy is flagging, according to Mark M. Zandi, chief economist and co-founder of Economy.com.

“We are in a transition from consumer- to business-led growth” said Zandi, speaking at the National Center for Database Marketing conference. “Consumers will become more circumspect. We need to see businesses expand. If that transition doesn’t go well, we will be back in a recession.”

The keys to recovery are resilient productivity growth, which either boosts corporate profits (and therefore investment) or consumer salary growth. Also critical are a federal fiscal policy geared toward stimulation, and low interest rates. All of these are in place, according to Zandi.

Zandi feels the potential war in Iraq presents the strongest obstacle to recovery. If it is quick and successful within the first half of 2003, its impact on the economy will be a blip. But a sustained campaign combined with a spike in oil prices could easily throw the U.S. economy back into a slump. Every recession since 1929, with the exception of 1961, has been preceded by an oil cost increase, Zandi noted.

Some business sectors have proven resilient to the downturn. According to Zandi, the healthcare industry is hiring, and the children of the baby boomers are creating a demand for educational services.

In fact, industries like automotive, financial products and housing may be seeing their best days right now because of low interest rates. But these segments may falter when the economy turns and interest rates are increased.

There is hope for recovery in 2003, but only if companies step up and start reinvesting.

Business investment has sagged from $69 million in early 2000 to around $57 billion at end of 2002, and consumer ability to prop up what it can of the economy is flagging, according to Mark M. Zandi, chief economist and co-founder of Economy.com.

“We are in a transition from consumer- to business-led growth” Zandi said in a session at the National Center for Database Marketing conference. “Consumers will become more circumspect. We need to see businesses expand. If that transition doesn’t go well, we will be back in a recession.”

The keys to recovery are resilient productivity growth, which either boosts corporate profits (and therefore investment) or consumer salary growth. Also critical are a federal fiscal policy geared toward stimulation, and low interest rates. All of these are in place, according to Zandi.

Zandi feels the potential war in Iraq presents the strongest obstacle to recovery. If it is quick and successful within the first half of 2003, its impact on the economy will be a blip. But a sustained campaign combined with a spike in oil prices could easily throw the U.S. economy back into a slump. Every recession since 1929, with the exception of 1961, has been preceded by an oil cost increase, Zandi noted.

Some business sectors have proven resilient to the downturn. According to Zandi, the healthcare industry is hiring, and the children of the baby boomers are creating a demand for educational services.

In fact, industries like automotive, financial products and housing may be seeing their best days right now because of low interest rates. But these segments may falter when the economy turns and interest rates are increased.

Zandi predicted that the government would issue marriage and child tax credits to give consumers a few more months of cash in their pockets if businesses are slow to start spending again. He also said there was “better than a 50-50 chance” that the government would cut payroll taxes in half for a few months during 2003.

For those wishing to follow the state of the economy, Zandi recommended several indicators.

If unemployment insurance claims rise about 400,000 per week, for example, that means more businesses are firing than hiring. Claims are currently right at that level.

In addition, commercial and industrial loan activity gives a clearer picture of whether companies are making business and inventory investments. “Given how low inventories are today, [a lack of activity] will mean that businesses have no confidence [in the economy] and are willing to lose sales,” Zandi said.

Zandi also tracks overall sales levels at Wal-Mart, the number of applications for home purchase mortgage loans and investment activity as represented in the Wilshire 5000 index. “If it falls below $8 trillion, we’re in trouble,” he said. “If it’s above $10 trillion we are out of the woods.”

At times, Zandi seemed almost apologetic for his opinions. “You guys are supposed to be upbeat and I’m a practitioner of the dismal science,” he said.