SEATTLE/ Conservative Monitor -- A recession was expected by a number of economists before the events of September 11. The stock market drift reflected the profit uncertainty and the timing of a profit recovery. The level of the stock market prior to September 11 had a remarkable price/earnings ratio for some analysts to be predicting a bottom. The decline since still represents a price/earnings ratio of a market high not a market low.

With the layoffs and curtailment of activities since the September 11 events, a recession now appears certain, and the timing of a recovery will be delayed. Analysts that promote the idea of a quick recovery and companies that assure investors that profit projections made prior to September 11 will be met are acting irresponsibly. There is too much uncertainty about how both consumers and businesses will react to speak with authority of the depth of any economic recession or the speed of an economic recovery.

We have no experience to grasp the impact on the economy and consumer and business confidence of the rapid decline in the travel/tourism industry and the resultant layoffs. A quick recovery of the travel/tourism industry is unlikely and the drop in consumer spending will impact other areas of the economy. A quick strike at the terrorists may result in a market jump but will not change the underlying economic problems. Until consumer and business confidence can be restored, a recovery is unlikely.

The government bailout of the airline industry may help investors in airline stocks but is unlikely to change consumer’s buying habits or result in additional employment in the industry. Reductions in interest rates may help eventually but will do little in the immediate future. I may be a skeptic, but Congress is more likely to use the talk of tax incentives to reward friends and supporters than structure a tax cut to stimulate the economy. Neither a tax cut nor lower interest rates is likely to change consumer confidence if there is not a major reduction in the threat of terrorism.

There are things the government could do to stimulate the economy, but even these will take time. Congress could provide funding now for infrastructure projects (roads, ports, airport and Corp of engineer projects) that are scheduled for later years. The FAA could expedite the modernization of the air traffic control system. There are other projects that could be moved forward to help stimulate the economy. These would provide jobs immediately and increase productivity in later years.

The speculative bubble in the stock market was not the only concern to affect an economic correction. The expansion of production facilities and retail and commercial space on the assumption of an ever-growing economy have also created a speculative bubble in capital investment. Capacity utilization is low while office vacancy rates are rising, suggesting it will be some time before a rebound in business capital spending can be expected, regardless of interest rates.

The stock market correction may be nearly complete, although it would not be a surprise if a continued drift to lower market levels occurs. Even as the stock market correction began, speculation in the real estate market was underway, people betting that house prices would continue to increase. As the market dropped additional funds were shifted into the real estate market. Unlike previous real estate speculation that was restricted to a region or a limited number of communities this speculation was more widespread. I do not expect to see the economy bottom until after a real estate correction, assuming no new surprises.

An increase in consumer confidence and a reduction in excess capacity, both necessary for the beginning of a true recovery, will take time. Many stocks still have not reached their lows, although bargains are available. The question is which stocks will be bargains next month or next year.