Bear Stearns economist sees stock drop moderating growth for next five years

By Ronda Fears

Nashville, Tenn., July 24 - Bear Stearns & Co. chief global economist David Milpass said the impact of the stock market's rout on the U.S. economy will likely keep growth at a more moderate level for the next five years.

In a conference call Wednesday, Milpass said he now expects the U.S. economy's gross domestic product to grow at 2 % for the second half of 2002, compared to 3% a few months ago.

"The declines in the markets have been immense and we have to recognize that that does have an impact on the economic outlook. A more important issue is, what's the long-term impact to growth, the impact on the U.S. system of wealth creation," Milpass said.

"If we've moved to a lower P/E ratio multiple environment because of uncertainty, which looks to be the case, then we have a higher cost of capital for equity investment. That means slower growth into the future. To an extent we have to recognize that we're making capital more expensive and that will have a negative impact on growth for the next five years."

To some extent, he added, investment is paralyzed. In other words, he said, businesses are investing less in new business due to a combination of factors, like the decline in the dollar, stock market collapse and the pressures from chief executive officers having to put their personal wealth in jeopardy to attest to their companies' accounts.

Moreover, Milpass said the current economic environment is virgin territory, which creates a level of uncertainty in itself.

"We're going through a deflationary shock, so it's very different from any previous situation, at least in recent history," he said.

"We haven't been through a deflation, and so we don't know how much bankruptcies come out of a given appreciation of the dollar."

With the dollar appreciation of , say 30%, and much of the market leveraged, as appears to be the case, he said a certain amount of bankruptcies are expected. But how much, and the acceleration cause by the decline in equities, is uncertain, he noted.

"The reason that I have been optimistic about the outlook in recent months is that we have a very flexible system, and so once the deflationary pressures stop, meaning the dollar stabilized and actually weakened a little, then there should be a workout period. It shouldn't go on forever," Milpass said.

"The key issue going forward is whether the equity market decline causes people to think that their future earnings power is less. Clearly, to some extent, that's the case."

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