2008 Economic Forecast: A Bumpy Ride
Mary Lou Santovec
Ever feel like you’re riding a rollercoaster with no stopping point? With the economy experiencing more ups and downs than a dieter’s scale, community bankers are hoping for a little smooth sailing for 2008. The question is, will they get it?
The likely answer is, unfortunately, “no.” While some economists are optimistic that the stock market and housing market gyrations are only temporary, others are concerned that what we saw in 2007 is the beginning of a long, drawn out recovery. Some are even using the “R” word – recession.
At the 2007 Management Conference and Expo, Jeff Thredgold, of the Utah-based Thredgold Economic Associates, presented his overview of the U. S. economy for 2007 and a few predictions for 2008. “The consensus is that things are slowing down,” he said.
Subprime loans are making news. Lenders bundled mortgages into securities and sold them to hedge funds and other investors. While the investments had Triple A ratings, Thredgold noted that the “hedge funds don’t know what they were, much less what they’re worth” thus the failure of several hedge funds. The upside is that there will be less of a market for these types of securities and fewer subprime loans. “The whole game has come to a stop,” he said.
After the subprime news broke, the Fed came in with a stimulus package that revved things up for a bit. But the ultimate judge and jury as to how fast the economy will come back will be the U.S. stock market. Thredgold admitted he’s realistic, but optimistic, too.
National unemployment has been about 4.6 percent over the past 20 months (Wisconsin’s ranges between 4.8 and 5 percent). Inflation pressures as evidenced by the Consumer Price Index rate of 2.5 percent appear to be under control with the consensus for 2008 ranging between 2.3 and 2.5 percent.
Interest rates for 30-year fixed rate mortgages have basically held steady between 2001 and 2006. Global economic performance is up except for the occasional blip. The seven critical industries for the future – technology, transportation, telecommunications, financial services, energy, entertainment, and biomedicine – all have the United States in a major position.
Four Silver Bullets
Thredgold’s optimism comes from four, U. S. “silver bullets.”
The first is the labor market. Because growth has been less than 1 percent per year, the market is tight. No longer can an employer run an ad and expect to receive 10 to 15 resumes. “Frustrated by the inability to find talented people and the fear or losing their best people, enlightened companies will pay their employees better and provide better incentives and benefits to keep the good people,” Thredgold said. Employers will also look to relocate to states like Wisconsin, which have a pool of potential employees.
The second silver bullet is the government’s entitlement programs – Social Security, Medicare, and Medicaid. “The next five to seven years will be NAP time,” Thredgold said, “meaning no alternative politics.” Congress will have to do something to ensure that Social Security remains viable for the next 75 years and that “something” might be to stretch out the retirement age like it did 24 years ago. “We don’t have to cut spending, but we do have to slow down the growth rate to make programs viable.
Ben Bernanke and the Fed are Thredgold’s third silver bullet. While at Princeton, Bernanke favored inflation targets and doing whatever it took to keep inflation within those targets. It’s likely that the bond market will make sure the Fed keeps interest rates low for the long term.
A year ago Thredgold predicted that the stock market would set a new record high and it did. He’s also optimistic that the market, the fourth silver bullet, will continue to do well over the next few years. Fear and greed motivate market performance. “The Baby Boomers haven’t saved enough for their retirement and Gen X realizes that they’re responsible for funding their own,” Thredgold explained. And if the stock market continues to gyrate, countries around the world will buy depressed U.S. stocks.
What About Wisconsin?
In Wisconsin the picture is a little hazy. Russ Kashian, associate professor of economics, University of Wisconsin-Whitewater, shares Thredgold’s optimism in some sectors. Kashian owns a small machine shop in Milwaukee that’s bursting at the seams with orders, most of which are from China. And as a business owner he’s not alone. “With the decline in the dollar, our agricultural products have become more affordable overseas,” he said. “Ag products are skyrocketing and ancillary products [packaging materials, etc.] are also going up.”
While the state’s housing market was down 20 percent during the third quarter of 2007, which in turn, depressed the housing construction industry, exports increased by about the same amount to offset the decline. “We’re at a fortunate time,” Kashian admitted. But don’t ask people who regularly shop at Wal-Mart and have seen the cost of imports rise how lucky they feel.
While Kashian is basically optimistic, he admitted that community bankers are in for a challenging year. “For bankers it will be a tough year because income has dried up due to a decline in the writing of mortgages,” he said. “I expect you’ll see a drop-off in lending because you don’t have the fee income to offset it.”
But out of that dark cloud, he sees a silver lining. While the real estate business is drying up, the upside is that savings rates are climbing. “The third quarter had a positive savings rate,” Kashian said. “Normally we have a negative one at this point.” And while the amount of the subprime debacle might never be known, it’s likely to be less than the savings and loan crisis was several decades ago, and the economy pulled out of that to record highs.
Yet all real estate is local. The more foreclosure signs appearing on lawns, the less confidence the American public will have in the economy and the more belt-tightening is likely to occur, prolonging the misery. Kevin Quinn, associate professor of economics at St. Norbert College thinks we’re in for a long haul. “The chickens have come home to roost, but I don’t think all the chickens are back yet,” he said. “There’s lots of stuff to be worked through.” Fortunately, even though Wisconsin foreclosures reached a record high in October, Midwest conservatism served us well. Wisconsin faces fewer problems than states like California and Florida.
Quinn’s not alone in his concern. Northeastern Wisconsin CEOs and business owners who participate in the quarterly Nicolet Bank Business Pulse, reported declining confidence in the economy during the second quarter. (The Pulse measures current economic conditions compared to three months earlier and future economic expectations over the coming three months.) At the end of the first quarter, 45 percent of the CEOs surveyed reported that their net profits increased compared with 27 percent who said they had decreased. At the end of the second quarter, only 36 percent reported increases in net profit compared to 40 percent noting a decline. That lack of confidence hasn’t been seen since the third quarter of 2002.
One area concerning Quinn is the spike in gas prices. “What has amazed me is how the U.S. economy has weathered the oil crisis,” he said. “How long can the U.S. economy weather $90 a barrel oil?” Also of concern are future real estate, credit, and unemployment rates. With the average age of Americans being under 35, they don’t remember the recession of the 1970s, much less the Great Depression.
Health insurance and the 2008 presidential elections will present some interesting challenges. At the state level, Governor Jim Doyle recently floated a trial balloon with state financed health insurance. But nationwide, the reality involves removing $1 trillion from the private sector and funneling it through the public sector. Immigration is also lying in the weeds for the next president. And Quinn is concerned about global warming and the policies and taxes that will be implemented to address it. “It could cause dislocation of manufacturers that are carbon intensive,” he said, and hurt the state’s economy.
Both Kashian and Quinn believe 2008 will see the bottoming out of the credit crunch and that 2009 should be the start of the recovery. Meanwhile, fasten your seat belts; it’s going to be a bumpy ride.
Published by Community Bankers of Wisconsin
through Client Communications
EDITOR AND PUBLISHER: Doris Green
CONTRIBUTOR: Mary Lou Santovec
ART DIRECTOR: Lisa Otto, Grey Horse Studio
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