U.S. in Early Stages of Economic Recovery, Say Economists
DALLAS - "The economy is picking up." "Mild recovery is gathering momentum." "The economy turns the corner." While the language may have been slightly different in each speaker's presentation, the overall assessment of the nation's economic status presented by three economists at Southwest Corporate Federal Credit Union's 26th Annual Economic Forum Oct. 28-29 was pretty much the same. "I think we are on the cusp of a sustainable recovery," said Christopher Low, chief economist for First Tennessee Capital Markets, as he gave attendees a Wall Street perspective on the economy. "GDP is accelerating, but it takes the job market time to turn around after recessionary thinking. Companies are playing it safe." Low called unemployment claims a terrific leading indicator of recovery. After peaking in Sept. 2001, unemployment claims dropped to pre 9/11 levels, but have not fallen below that level in the last year. "When claims first start to fall sharply, it will be a strong sign the recovery can sustain itself," he said. Low believes manufacturing jobs lost to India and China will be replaced in small entrepreneurial business start-ups. He could not venture a guess at the types of industry that might evolve, but suggested they likely would not be labor intensive. Low said a low interest rate environment and tax cuts have fueled consumer spending. Mortgage refinancing kept consumer spending positive through the recession. Low cited estimates that half of all mortgages in the U.S. were refinanced last year. On the flip side, corporate recovery has been slow, but optimism is picking up, Low said. Capital spending, hiring, and profit margins have risen for 3Q 2003. Large firms, such as UPS and Yellow Trucking, he said, have been hiring new employees. "They're not hiring because they want to, but because they have to. That indicates demand for their services by other businesses is picking up." Concerning interest rates, Low predicted the Fed is on "perma hold" until at least July 2004. "The Fed is interested in preventing inflation from falling too low. Short-term rates are not going to go up; long term rates will fall before going up," he said. Bill Hampel, chief economist for Credit Union National Association, gave forum attendees a credit union perspective. Through 2004, he predicted inflation would remain under control, with short-term rates gradually rising. Barring a catastrophic event, such as another terrorist attack, he foresees small risk of double dip recession. His outlook for credit unions in 2004: stronger loans, softer savings, flat liquidity, somewhat lower earnings, and a slight drift downward in net worth. Hampel expects balanced loan/savings growth of around 8% next year, although he said loan growth could march as high as 12%. He projects loan growth for 2003 at 10%. Offering a national perspective on the economy, former Fed Board Governor Larry Meyer said the country is entering the first year of normal expansion. "The key to normal expansion after a recession is how quickly you move to above-trend growth and the unemployment rate declines. It's a very big moment in the life of the financial market when you move on a stable basis to above-trend growth, because then unemployment starts to decline. After a point, inflation will stabilize and begin to rise, and interest rates will begin to rise. "The economy has been expanding for a long time; recession is dated to have ended in November 2001, but falling employment has been the Achilles heel here." "The word we hear more and more today is sustainability. There are real concerns about how to keep the economy growing at above-trend rate with the employment rate falling. The next 2-3 quarters look okay, but by middle of next year, we do have some issues to worry about." Meyer listed concerns as declines in contribution from inventory investment, decline in fiscal stimulus, decline in mortgage refinancing, and the trend toward outsourcing abroad. Dynamics of the first year of recovery, Meyer said, will include inventory replacement, a release of pent-up demand for equipment and high-tech purchases, lagged improvement in employment, a rebound in productivity, a surge in profits and disinflation. Meyer forecast GDP growth at 5% for the 2nd half of 2003, falling to 4.25% next year. He predicts the unemployment rate has peaked at 6.2 this year and will fall slowly to 5.6% by the end of next year.