2012 Economic Outlook ConferenceElizabeth Bush / Daniel Island News
Economy Good...For Now
It's a present we could all use this holiday season – an optimistic economic forecast for 2012. Daniel Island resident Stephen Slifer, owner and chief economist for NumberNomics, LLC, gave his audience just that at an "Economic Outlook Conference" held on December 6 at The Daniel Island Club.
"Over the course of the next four years, get the words 'recession' and 'double dip' out of your vocabulary," said Slifer, who served as keynote speaker for the program. "Just forget them for a while. I don't think that's terminology we should be looking at...not for 2012 or 2013."
Slifer told the 150 people gathered at the event that the time to be looking at a possible recession is actually in 2015 or 2016, when he expects the federal funds rate to go back up, a "tightening" often followed by an economic dip.
"Every single recession that we have had going back, certainly through my life, has been preceded by a significant hike in interest rates...To me, it's a long way down the road. We'll see."
Slifer served as Chief U.S. Economist for Lehman Brothers from 1980 to 2003, and prior to that was a senior economist at the Board of Governors of the Federal Reserve in Washington. He admitted the current economic crisis in Europe has gotten many nervous about its potential ramifications in the United States. But, he cautioned, the situation may be a bit "overblown."
"I am having a hard time really believing that in the absence of just some calamitous decline in Europe that we can't withstand that," he said. "It will have some impact, but it will not be the kind of thing that derails the economy in 2012."
It's far better, and perhaps more telling, said Slifer, to focus on the positives. And in recent weeks and months, there have been several indications that things may in fact be on the upswing. Take a look at consumer sentiment and spending. Slifer showed the crowd a graph representing the Gross Domestic Product (GDP) in the United States. Consumers make up about 66 percent of the pie, he explained, and their habits might just reveal reason for at least a little hope.
"In the late fall, (when) we had that big decline in the stock market followed by the debt ceiling debacle, consumer sentiment took a powder. It...dropped like stone. And interestingly, that lower level is roughly the same level that we reached on several occasions during the course of the recession. I think that people got scared...we felt terrible, but yet, our spending didn't follow...It grew by 2.5 percent! So we said one thing, yet we didn't do anything differently."
Slifer attributes that increased spending rate to the fact that consumers used the last couple of years to pay down personal debt. He also noted that recently, within the last 6 or 7 months, folks are actually beginning to take on debt again.
"So for somebody who makes $50 grand, $1000 a week, they might have taken $100 and used it to pay down debt every month. If you do that often enough, you're going to get to a level of debt that you feel comfortable with. I think we're kind of there...and that has enormous implications for us going forward."
On the corporate side of things, profits are at record high levels and businesses are spending more. In the third quarter of this year corporate spending was at 14 percent, Slifer said. In addition, the backlog of orders is on the rise, a good indication that production will follow.
"This investment spending has been the fastest growing sector of the economy since this expansion began," he said. "And these guys aren't showing any signs of slowing down."
All of which adds up to good news for the immediate future.
"As I see it, we sit here and look at the consumer, we look at the business person, in between those two wedges (of the pie chart), we're accounting for about 75 percent of the economy. I think that's going pretty much down the right path for us in 2012."
Signs of a housing recovery have also been on the horizon, Slifer said. While home prices have dropped 30 percent from their peak, he expects that will present new opportunities for many in the market to purchase.
"Yes, home prices have dropped," he added. "If you are a homeowner, that's a problem. If you are a home buyer, that's an opportunity...Combine that with a 30 year mortgage rate that is four percent, record low level. Now that we're creating a few jobs, income is going to grow. You put that together and what you find is that housing today is as affordable as it has been anytime in the last 40 years...That strikes me as sowing some seeds for improvement.
Although the unemployment rate is on the decline (recently released reports indicate it has moved from nine percent to 8.6 percent), Slifer is somewhat concerned that the drop is not spread evenly among populations. For African Americans in particular, he said, the unemployment rate is 15.5 percent. For teenagers, it's 25 percent, and if you are a recent college graduate, it's 17 percent.
"These are the youth of our country," Slifer said. "This is the future. When you get that first job, you start learning the skill set that enables you to move up the corporate ladder and boost your income, but these people cannot get their foot in the door. That is bothersome. I think we've got to do something."
Also of concern, Slifer added, is that of those unemployed, about 43 percent have been out of job for six months or longer. That's the highest rate the country has seen since the Depression, he said. Slifer predicts the overall unemployment rate will continue to decline to about 7.6 percent in 2012.
"We are creating jobs," he told the crowd. "...We're just not creating enough of them."
Another potential positive in today's economic mix is a pool of money – about $1.6 trillion in bank reserves - waiting in the pipeline to be spent.
"It's 1600 times bigger than whatever it used to be prior to the recession," Slifer said. "The way to think about that is that represents the pool of funds that is available to banks to lend at whatever point in time they are willing to lend, and you and I as consumers and business people are going to borrow. We're not there yet. What scares people is that the fed has all of these reserves in the system. At some point, they gotta run them out. The question is, can they get them out quickly enough to prevent a big uptick in inflation?
When it comes to government spending, in light of current budget deficits, Slifer is not sure increasing government spending is a good idea. But, as Slifer explained, there may be more pressing matters to focus on.
"If the (unemployment rate) is going to be as high as what I and everybody else seems to think for a protracted period of time, can we afford not to spend the money? Can we let these people stand around without jobs for that long? I don't know. It's an interesting question. I think I would vote for doing something now and worrying about the consequences down the road."
For now, Slifer chose to give his audience the gift of brighter future, marked by a three percent rise in GDP growth for 2012.
"If somehow we can turn this thing around and get housing back on board, I personally think things may turn out better than what I've described...I'm already kind of hanging out there...The way out of this is to get more growth going, and that's a solution not just for the U.S., but for Europe as well."
The "Economic Outlook Conference" was sponsored by the Daniel Island Business Association, Charleston Digital Corridor, Charleston Regional Business Journal, NumberNomics LLC, and Wells Fargo Advisors, LLC. The next event in the series will be held on January 10, from 7:30 am to 8:30 am, at the Daniel Island Grille. Guest speaker Brian Penney, vice president of First Trust Portfolios, LP, will present "A rising dividends strategy can help in difficult economic times (and good ones, too!)." RSVP by calling 849-3308.