In the past few years, businesses have had to play a game with odds. They didn’t know what the regulatory, legislative, or tax environments would bring. As a result, many businesses decided not to play the game.
Legendary British economist John Maynard Keynes once wrote in The General Theory of Employment, Interest and Money: “The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.”
“Anybody who goes to casinos knows what ‘appropriate toll’ is,“ said Dr Martin Regalia, senior vice president and chief economist of the US Chamber of Commerce, “but in business, we like to evaluate the odds and then make a decision and move forward. We don’t want those odds to change. Now we’re hoping—hoping—going forward that we can achieve an environment where we only have to evaluate the odds. We don’t have to evaluate the vagaries of a political process.
“When we look at the economy today, we’re growing once again and attaining more balance. And it is moving forward. That’s all good news. It wasn’t fun to stand here in 2008 and say, ‘We haven’t seen the bottom,’ and nobody knew how bad it’d get. Now we’ve seen the bottom and we’re moving up.”
In his Heavy Duty Aftermarket Week presentation, “US Economic Outlook: 2011 and Beyond,” Regalia said the economy is stabilizing, there is no indication of a double-dip recession, and modest improvements in growth are forecast.
Gross domestic product (GDP) grew 3% in the fourth quarter, and was expected to grow between 3% and 3.5% in the first quarter and between 3.5% and 4% in the second half of this year.
“That is a critical distinction, because the economy’s long-run potential is about 3%,” he said. “When it’s growing below potential or at potential, it’s not creating jobs. New jobs that we create are just employing the new entrants and don’t employ people who are laid off. They don’t gain back and fill the hole. That’s why getting above 3% is critically important.”
Regalia broke it down by categories and provided an analysis:
“1975 and 1982 were long recessions. But coming out of those, we grew almost 6.5% in 1975 and close to 8% in 1982. We were able to employ all displaced workers in nine to 12 months. Since then, when you look at the 1991 and 2001 downturns and this recent one, we see much smaller growth—below that magic 3%. As result, it took 23 months in 1991 and 39 in 2001 to get back to prior levels of employment. This time around, it’s going to take even longer. If we grew at the pace we grew last year and created the jobs we created last year, we would never get back to prior levels of employment. We simply have to get the economy growing faster. And what we’re seeing now is that faster growth. As result, we’re projecting we’ll create 2.5 million jobs. That sounds like a lot and it’s a lot better than what we were doing, but even that is short of the mark of what we need.”
Personal consumption outlook
“It’s what drives everything. In 1975 and 1982, we had a lot of pent-up demand. People had to spend, and they came and spent with a vengeance. In the last few recoveries, we haven’t seen that. Consumption is two-thirds of the economy. We need consumers spending more money. It’s a factor of income and wealth. Some still spend money with credit cards. But in this environment, we didn’t see that. Markets were in such disarray that people didn’t use credit cards. There was a slowdown in mortgage and business credit. When you don’t have incomes and wealth and credit, you don’t see consumption. We’re seeing a pickup in disposable income.
“When it’s not creating income the old-fashioned way with new jobs and higher wages, the government can help by taking less of people’s money and putting more in their pocket. That’s what happened when they passed tax cuts in 2001 and 2003. There’s always a debate when there is a tax cut: Will people spend it or save it? This time around, we’re not getting a tax cut. We were getting an extension of a tax cut. They extended it to middle income and are putting a tax increase on the wealthy, and that slowed economic growth.”
“I was talking to (American Trucking Associations chief economist) Bob Costello, and he said trucks move 60-65% of the business. He said it’s picked back up. Truck tonnage is up. We haven’t seen a pickup in sales yet. Not only is the economy picking up, but because this industry cut back considerably during the downturn, it’s now poised to expand more aggressively during the upturn. This is good news for anybody who has anything to do with trucks and moving products on trucks.”
Housing market trends
“We lost $14 trillion in wealth with the decline in the stock market and housing. The stock market has come back and started out 2011 pretty good. It recovered $6 trillion of the wealth we lost, but there’s still a large chunk out there, embedded in the housing market. And that’s why the recovery of the housing market is so important.
“There have been tremendous drops in starts and huge increases in inventory, along with unprecedented declines in prices. But now we’re seeing the housing market stabilize and, in the Midwest, we’re seeing price increases again. We’ve started to see a bit of building, and they’re working off the inventory backlog. At one point, we had one million vacant, for-sale homes, and that’s down to 600,000. So we’re moving in the right direction. It’s going to take some time, because of a huge backlog. We’re starting to see more of this backlog worked off. It’s going to take probably another year. We’ll see soft home prices, but shouldn’t see rapidly falling or aggressively falling prices. Housing is a key. Recently, we’ve seen increases in mortgage rates, which is not a good thing. This is an area of the economy that remains weak.”
“It’s done reasonably well. The problem is that the timing is off a bit. Normally we see consumption come back first—that drives down the inventory sales ratio, gives rise to more orders, then more investment and more hiring to fill those orders. What we’ve seen is a lot of investment in equipment and software, but we haven’t seen consumption driving that. There’s a lot of talk out there about cash businesses are holding in excess cash reserves. Why don’t they use it to hire more people? Well, if businesses can meet demand without using that cash, they’re not likely to use it. It’s the economy that drives the need. When you’re meeting demand with current overhead and staff, you’re not likely to go out and expand, especially in an uncertain environment.
“Corporate businesses start to look a little bit like food to their competitors. They’re takeover targets. We’ve seen some of that. That doesn’t bode well for new job creation, because they’re putting it into more equipment and not putting it into more labor. Going forward, we expect a pickup in consumption—modest—and a little bit of a decline in investment in equipment and software, and a bit more balance and staying power in the economy.”
“Industrial demand is up and profits are up, so the ability to finance is up. Business confidence is up and the inventory sales ratio is low. All of these are a positive sign for continued investment. Seventy percent of the economy is consumption. It’s picking up. Another 15% is investment—it’s strong, a positive sign.”
“Over the last five years, there have been an improvement in trade and an increase in net exports, driving the trade deficit down. That has been a blessing to the economy. When the world looks like it’s coming apart, even with all the trouble in our financial markets, people fly to the US dollar. We’re still a country with the strongest, deepest markets. We have a government that is stable and still stands behind the economy when necessary. Now we’re starting to see the dollar settle in and we’re seeing more growth abroad. In 2008 and 2009, we actually saw declines in GDP in the world economy. 2010 grew about 5%. Most expectations are that the world economy growth this year will be in excess of 4%—that’s low but positive, and strong enough to improve the trade deficit. All of that bodes well for growth.”
“Here is where the real problem is. While we’ve started growing, we still haven’t seen the job increases. We’re still down 7.5 million jobs. That is a bundle. The unemployment rate is still elevated. The initial claims numbers, while improving, are still high by historical standards. It’s averaging just over 400,000. In the first year of the recovery, it averaged over 450,000. In an economy as good as 2004-2006, we had that number around 300,000, so we still have a ways to go. When you look at stats to see where we’re pointed, the direction is up. It’s not steeply up, but it’s up, and that’s important.
“The median duration of unemployment is 22 months. The average duration of unemployment is 34 months. What happens when you stay unemployed for long? Your skills erode and you are less employable when you come back in. We have created a structural problem we will be dealing with in this economy for a long time to come. We have to do more to re-educate and refine the skill level of people. Many do not have the skills to re-employ in parts of the economy that are doing better—health care, education, high tech, IT. Just creating longer unemployment insurance doesn’t do it. Recent studies show that the more unemployment insurance there is and the more it’s extended, the less impetus there is to find a new job, and the higher and longer is the duration of unemployment. People need the incentive to re-enter the work force and to be given the tools.”
“Core levels of inflation are well behaved, but when you look at commodity prices, metals, oil and gas and diesel fuel, we’re starting to see prices go up. As the economy picks up, demand will pick up, and supply is not increasing. We have numerous resources in this country to meet fossil-fuel demands. We have oil reserves, wells in the gulf that are closed, even shallow-water wells where we have technology and a long-standing safety record to justify going after that, and we’re not doing what we need to do to develop these resources. You can’t rely on wind power to run our economy. It’s a component of the future that is not viable in the present. We are a fossil-fuel-driven economy and will be for the next 30 years.
“We have to be realistic about what we’re going to do if we’re going to avoid these spikes. Every $10 increase in the price of a barrel of oil knocks .5 % off our GDP. If oil reaches $140 a barrel, like we saw some time ago, it could push the economy back into recession.”
Interest rates and spreads
“Spreads have largely come back, but lending volumes have not. If you talk to banks, they will tell you, ‘We’re meeting the demand.’ We have done surveys of smaller businesses, and 90% are getting all the credit they want. If you talk to bankers, they say, ‘Hey, we’re trying to make every loan we get.’ Talk to examiners and they say, ‘We’re re-educating our examiners to make sure they’re not being overly restrictive and writing down loans on 2009 standards instead of 2010-2011 standards.” The natural tendency is to be a little bit stricter, rather than looser.”
“We don’t have excess capital in this environment. The Fed is pumping in the money like I’ve never seen it in my life. This is absolutely unbelievable. The level of excess reserves in the banking system is 500 times the norm prior to the downturn. The problem is that while excess reserves make the banks feel better and makes the Fed feel better because it knows banks have liquidity, it doesn’t make you feel better because money is not getting lent out and not getting spent. Until this money starts getting lent out and spent, it’s not doing you any good at all. In the long run, it creates an issue, because what happens when the velocity of money finally starts to pick up or bank multipliers start to pick up? Then the Fed has to reverse this. Because if they don’t, we’ll see an inflation spike and higher interest rates that will crunch lending and the housing market. So the Fed has to pull this back a little bit at a time. This is a tightrope. It’s a tightrope we’ve never been on.”