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U.S. economy best in history; no recession till at least 2021, 2 experts claim
Thursday, 02 May 2019 15:52
By JOHN NORTH
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The United States economy is firing on all cylinders in its best performance in history — and no recession is likely until 2021 at the earlest, according to two noted economists who spoke at UNC Asheville’s 35th annual Crystal Ball seminar on held April 17 in UNCA’s Lipinsky Auditorium.

Most of the auditorium’s 580 seats were filled for the seminar, mostly by members of the local business community. The event, along with a reception immediately prior to the seminar and a question-and-answer session afterward, was sponsored by Parsec Financial and UNCA’s Department of Economics. 

Economists David W. Berson and James F. Smith made forecasts on the business and financial outlook for the coming year, taking account of new federal tax policies and Federal Reserve decisions about interest rates.

An event promotion flyer noted that “the economic outlook portion of the program will focus on inflation, employment, interest rates, the strength of the dollar and housing market. The financial outlook presentation will explore the implications of Federal Reserve policy for financial markets. Various investments will be addressed, with an emphasis on interest rates and the bond market.”

Moderator Joseph Sulock, an economics professor emeritus at UNCA, opened by noting that, “when I think about the economy, several things occur to me... One is that the Fed has eased up on interest rates....”

“It’s been almost 10 years since we had our last recession. It makes you wonder how long this will last.. We will soon know fact from fiction as we have two of the finest economists in the country to tell us” what is happening now, economically — and what can be expected in the next 12 months.

Sulock then introduced the two speakers.

Berson is senior vice president and chief economist for Nationwide Insurance, where his responsibilities involve leading a team of economists who act as internal consultants to the company’s business units. Berson’s numerous previous professional positions include vice president and chief economist at Fannie Mae, president of the National Association of Business Economics, and a senior management position with Wharton Econometrics Forecasting.

Smith is chief economist at Asheville-based Parsec Financial. In his more than 30 years as an economic forecaster, Smith has served in private industry, government and academic institutions, including tenures with Wharton Econometrics, Union Carbide, the Federal Reserve and the President’s Council of Economic Advisors.

As Berson walked to the lectern after his introduction, Sulock noted, “I am grateful for, and impressed by, his (Berson’s) commitment to this event. In fact, this is his 30th appearance here. To commemorate that, we have a special presenter.” He then was given a blue T-shirt with large gold letters, emblazoned with “Crystal Ball” on the front and “XXX” on the back. 

Berson, who flew in from California for the night’s event and seemed pleased with the gift, began his 24-minute address by noting that New England Patriots quarterback “Tom Brady played college football at (the University of) Michigan,” his alma mater.

In reference Michigan’s advancement the previous night in the NCAA men’s basketball tournament, he said, “If this seminar was done yesterday, I don’t know if I could have done this. We’ve now made it to the second round for the first time,” so Berson said he is fine to speak.

Continuing on a light note, he told the Crystal Ball crowd, “OK, head for the hills. If you haven’t gotten there, it’s too late.”

As the crowd laughed in response, Berson asked, rhetorically, “Is a recession coming soon?”

He added, “The numbers weren’t going (well) earlier in the year, even in March,” which prompted concerns about a looming recession.

What’s more, during “the last week of March the yield curve inverted. And that’s been the best indicator of a recession” in the nation’s history.

“Normally, the yield curve is upward sloping because nobody has any idea what is going to happen... Most of the time, longer term rates are higher than shorter term rates, but not all of the time... When they tighten by too much, we get an inverted yield curve.”

In reviewing with the crowd a PowerPoint presentation on a large screen, Berson said, “Look at this — it was an inverted yield curve. Recession coming! Well…no. Not just any yield curve. So you need more than a 3-basis point conversion. It was three days in length. Probably three days in March. But it was the last week in March. If the yield curve had stayed inverted and was inverted more than this, then we would have been concerned that this was a signal of recession.”

He added that “the Conference Board looks at a number of economic indicators… It’s also a pretty good predictor of recessions.

“Where is it (the yield curve) today? So not only is it below zero, but it’s now moving a little upward. So this doesn’t give us any worry at all that a recession is going to come in the next year.”

Further, he said, “There are many things that could go wrong — Brexit…. If it goes badly, then both the UK (United Kingdom) and EU (European Union) could go into recession.” He also said China could experience major problems.

“Lots of things could go wrong. Then we could get a more meaningful inverson of the yield curve. I think you need a number of things to go wrong,” but the briefly inverted yield curve in the U.S. is not an indicator.

“So the recession probabilities today are about 25 percent — that’s not inconsequential. That’s a reasonable probability. So it’s a reasonable thing to look at your portfolio to make sure you’re OK for a recession.”

Berson then noted that “Joe (Sulock) mentioned that the Fed appeared to be pausing in its tightening of monetary policy,” having tightened “three or so times this year.”

The economist asked, rhetorically, “Most importantly, why is the Fed tightening?” In answering his own question, Berson said the Fed’s goal is understood to be achieving “th lowest unemployment rate consistent with stable prices,” with a goal of a 2 percent inflation rate.

With a smile, he said, “The Fed should just declare victory and go home,” as the U.S. now has a 2 percent inflation and a 3.8 percent unemployment rate.

“We’ve got weaker numbers in economic activity… And we’re farther and farther away from our inflation target. Why are we tightening? So the Fed has changed policy totally. In March, the Fed said we won’t be tightening for a while.”

He then asked, “Will the Fed, in fact, start tightening when inflation moves back up to 2 percent? The Fed is thinking maybe we should let inflation get up a little higher… maybe 2.5 percent — and then we’ll start to slow it down. 

“If the Fed says 2 percent is where we want to be… Then we could see economic growth 2-2.5 percent for a number of years.

“We’re looking at three different scenarios. One that inflation picks up. The second is that inflation stays a little below goal — and then the economy could continue growing at a healthy pace for years. Not very exciting. The third thing, very exciting, is inflation picks up very seriously, the key is what happens with productivity. Then wage gains are not necessarily inflationary. If productivity doesn’t rise, then you have inflation and a recession.

“There are other measures of inflation… The alternative measures that have been leading indicators of where the CPI (Consumper Price Index) will go have been running pretty high.

“Unemployment rate… Here we are… very low. We probably are at an employment rate at which economists consider full employment.

“If wage gains go up and productivity growth does not, they can cut wages or raise prices... The wage growth is clearly picking up — a  good thing unless productivity growth drops.

“I’ll leave you with the disclosure which is: What I said might not be right. It’s a forecast. Yeah!” Berson concluded, prompting laughter from the crowd.

Sutlock, the moderator, said, “Thank you, David. Very informative and very entertaining.”

Next, Sulock said of the second (and last) speaker, Smith, “What impresses me most about Jim is he is no shrinking violet. He’s not afraid to deviate. This happens to be Jim’s 33rd appearance. Since David got his T-shirt for his 30th year, fair’s fair.” He then presented Smith with a T-shirt emblazoned on the front with the words “Crystal Ball” and the back with “33.”

Smith, who spoke for 25 minutes, began by noting that “David (Berson) has talked a lot about yield curves. I will tell you more.”

In his PowerPoint presentation, Smith pointed to inverted yield curves from the past that lasted four months or longer. “We’ve never had an inverted yield curve lasting more than four months that wasn’t followed by a recession. We have had four recessions between in 1937 and 1954 that were not preceded by inverted yield curves. Seventeen recessions were preceded by them.

“We’re now 102 months and counting…. Every month we’ve had more people with jobs than the month before. We’ve never seen that before,” Smith said.

“In Asheville, we also have an unprecedented statistic.... Every month for 53 months, October 2014 to date, with more non-farm jobs, hrough February this year. Pretty amazing.”

Given that there is a “$25.5 billion economy in Asheville, and multiply it by 1,000, and you get the entire U.S. economy.

“The U.S is by far the largest economy in the history of the world. China is number. two. The EU economy, right now, is about the same size of the U.S.” econony.

“Nobody knows what’s going to happen with the Brexit,” Smith noted, but “the EU said last week you (the U.K.) have till Oct. 31” to decide an exit plan. “So we have the world’s biggest Halloween surprise” approaching.

Regarding Brexit in general, Smith said, “Economically speaking, it’s total insanity.” He predicted that the UK will suffer severe economic consequences from the move, but, eventually, the UK likely will bounce back “ However, the transition is going to be painful, horrible.”

As for the U.S. the economist said, “We had fabulous news today — that 192,000 people filed first-time claims for unemployment. That’s the lowest since Sept. 6, 1969 — almost 50 years ago. Everypone assumed it would go up... No, it went down. If it goes down again or even stays flat, we’ll have another 49-year low.

“For one year now, we have had over a million unfilled job openings every month than the total number of unemployed people. You know if you’re an employer, you’re biggest single problem is finding qualified people.

“The total number of job openings versus the number of unemployed people — we’ve never seen a situation where there’s more job openings than unemployed people.”

Still, Smith pointed out, “There are tens of millions of people not in the labor force who could be working if they wanted to. The number one reason (for not working) is they’re retired — and they like it. But if they get bored, they can go out and find a job. There are disabled people who think they cannot find a job. But if they could find physical assistance, they could find a job” in today’s super-tight labor market.

“The labor force participation rate is simply a measure of the total number of people looking for work divided by the total labor force... Labor force participation rate peaked in 1969. We saw it (also) in 1999 — and it’s even greater today. That rate has been inching up. People have been seing employment opportunities all around the U.S. and saying ‘wow.’”

In summary, Smith said, “Last year was great. This year will be great. Next year will be greater. Those graduating will get several offers. It’s really a salaries’ market” for graduates.

Pausing, Smith then said he wanted to share suggestions for audience members to consider from two experts.

First, he cited George Shultz’s advice, noting “he’s 96 years old and still working away at the Hoover Institution at Stanford University. He suggests changing to make NAFTA just like in the EU. Estimates are that we have 3 million undocumented aliens in the U.S. — 56 percent are from Mexico.” Smith said Schultz believes “we could solve our illegal immigrant problem” by changing NAFTA.

Smith then told of Microsoft founder Bill Gates’ suggestion to “pass a new law in the United States, where  every single person who gets a degree from a community college or four-year college, we should staple a green card to their diploma... We have a very long history of stealing the best and brightest from other countries.”

Pausing, Smith asked, rhetorically, “What’s the bottom line? Things are pretty good. We have more people employed that ever before in the history of the United States. They are making more money, adjusting for inflation, more money per household than ever in U.S. history. And it’s higher than any other country in the world. And that’s the median income.

“Those people are producing more goods and services than ever before in the history of the U.nited States.

“All of these records, with lousy retail sales — it doesn’t make sense,” given that “the mantra of the United States is to ‘shop till you drop,’” he said, prompting laughter from the crowd.

“We finally got good retail numbers today. So that GDP number is now 2.7 — a pretty good improvement… That will keep us going probably close to potential (probably between 2 and 3) percent.

“So the outlook is pretty darned good. Not phenomenal, but pretty darned good. Overseas looks tougher. The world (beyond the U.S.) is going to grow, but not so fast as last year.

“I’ve got a recession in 2021” predicted, Smith said. “Certainly not this year, or next year....” Just before the downturn, “We’ll be all tied up next year in a giant election year” in 2020, he said.

During a 15-minute question-and-answer session that followed the two presentations, a man asked about the recent decline in sales in the U.S. automobile industry. Also, he said, “I was surprised to see auto delinquency called out” in the Crystal Ball presentations, “but nothing about mortgage delinquencies.” 

Berson replied, “Well, auto delinquencies are up, while mortgage delinquences are down. Clearly, the macroeconomic thing that would cause auto delinquencies to go up is people losting their jobs. But that clearly hasn’t happened....”

Another man asked the economists to expand on what is happening with a” household formations” in the U.S.

Berson said, “Household formations are very good for economic activity. So there’s pent-up demand for households. That’s good news for households. We’ve seen vacancy rates decline. If we keep seeing this, I think we’ll see a pick-up in new construction.”

The same man then asked, “Any thoughts on the national debt?”

“It’s way too high,” Smith replied. “I think it’s going to get worse ‘til it gets better. Some day we’ll have to pay the piper. But not any time soon.”

Berson added, a bit quizzically to Smith’s “Well, some day we may have to pay the piper,” but then, again, “we might not have to” pay off the national debt — ever.

Another man asked, “Do deficits matter any more?”

“Deficits matter,” Berson answered. “It was primarily an increase in spending that gave us an increase in the deficit. Other than putting rules on ourselves… I think we’ll continue to increase spending more than our income.”

The same man then asked, “How long do you think we can do that?

“It’s a bomb,” Smith replied. “It gets worse all the time. Someday, it will become solvable. But that day is not 2019, 2020 or probably 2021.

“To make huge progress, you’d have to do things that probably would be political suicide, like eliminate Medicare.If we could slow down the rate of spending, the deficit will solve itself.”

To that Berson added, “Remember — we had a recently significant (budget) surplus during the Clinton amdinistration.”

A man asked, “So in the last year there’s probably been more discussion about appontments to the Fed board of governors than I’ve ever heard. I wonder if I should put my name” in the running for a seat. The man also lamented that “what’s supposed to be nonpartisan is becoming partisan.”

In disagreeing with the man’s supposition that the Fed board has had a history of nonpartisanship, Smith replied, “Oh, it’s been partisan since Franklin D. Roosevelt. The guy he appointed slept inhis office for a decade. 

“What we know is Fed board members works their tails off. Businesspeople don’t work hard on the same kinds of things and find themselves (unhappy) reading staff papers that make their eyes glaze over. 

“The worst Fed chairman — Jim William Miller — was appointed by Jimmy Carter” in 1976. It was so bad (under Miller) that President Carter said (to Miller), ‘I’ll give you a big promotion to treasury secretary” in a successful effort to smoothly remove him from the Fed helm,” Smith said.

“Businesspeople, generally speaing, do very, very bad on the Fed. It’s a losing game. So you’re probably as qualfied as anyone,” Smith told the man, who was joking that he should toss his name in the hat for a Fed job. The audience laughed at Smith’s jest.

Meanwhile, Berson praised Carter “for redeeming himself by appointing Paul Volcker, who turned out to be one of the Fed’s best chairmen.

Berson ended the night’s program by noting that, as of June 16, “it will be the longest expansion in the history of the United States.”


 



 


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