DALLAS — Five years ago, the U.S. economy began a cycle of economic expansion. It didn't feel much like an expanding economy until 2003, but momentum picked up and stayed strong… until recently.
Now the pace has slowed, and the predictable question being asked is, "Are we headed for a recession?" Economists gave their answers to that question and others at Southwest Corporate Federal Credit Union's 29th annual Economic Forum at the Westin Galleria Hotel here on Oct. 25-26.
Among the financial analysts speaking at the forum was Diane Swonk, senior managing director and chief economist for Mesirow Financial, a Chicago-based diversified financial services firm. Slowdown, not recession, was the word Swonk used to describe the economy in upcoming months.
"The economy looks better on paper than it feels to a majority of Americans today, because the Fed brought us from an exceedingly high to an exceedingly low pace very quickly. It's like being in a car that suddenly drops its speed from 70 to 50 miles per hour. From your perspective, it feels like you're barely moving," Swonk said. "The economy will get better, but we'll have to go through a slowdown first."
Consumers are showing less confidence in the economy for several reasons, according to Swonk. Ninety-one percent of the population is dependent on annual wages of less than $100,000. And although employment figures have risen, employers are distributing the same wages over a larger labor pool today, actually resulting in lower individual wages. On the other hand, fuel prices, real estate taxes, and homeowner's insurance premiums have gone up, and consumers are shouldering a greater portion of their health care costs, leaving most Americans "feeling pinched."
Conversely, the business sector is compensating for sluggish consumer spending. "Commercial construction is more than making up the difference, resulting in a shortage of workers and materials. Trigger points are the oil industry, both in production and infrastructure, and energy efficiency," said Swonk. "Oil prices eventually will stabilize, but people are managing their energy costs more tightly."
Economic growth may continue through 2008 and possibly into 2009, albeit at a slower pace, Swonk said. "It will take some work to get it there, but like fine wine, economic expansions only get better with time. Older expansions are when the riches reach the masses."
Bill Hampel, chief economist for CUNA, said credit unions could begin to worry about a recession if the inversion of the Treasury's current yield curve (Fed Funds and long-term interest rates) gets steeper and lasts.
"The last two times we had an inverted yield curve, it was followed by a recession. It has been inverted by only 20 to 30 basis points for only six to eight weeks so far. If, however, the inversion gets steeper, say 40 to 50 basis points, and stays for six months, start planning for a significant slowdown in the economy. If the curve becomes less inverted, you can start talking about when growth will pick up," Hampel said.
For credit unions, Hampel predicted weak savings growth of 3% for 2006 and 7% for 2007, loan growth of 8% in 2006 and 5% in 2007. Hampel urged credit unions to spend more time evaluating their loan policies to make more loans and work toward bringing in new, younger members. "I am not as worried about the economic forecast I've discussed today as I am about the slowdown in credit union membership growth of less than 2%. The average age of the population has not gone up, but the average age of credit union members has. The young need the benefit of credit unions the most." U.S. dominance of the global economy is in its twilight years, Don Reynolds, former chairman of federal pension and investment committees, warned attendees.
"New engines of global economic growth now exist, and fundamentally, America no longer controls its economic fate," he said.
"The economies of emerging markets–namely China and India–are projected to grow at a rate of 7% per year, while developed markets are projected to grow at only 2.5% per year."
This year, according to Reynolds, China replaced Germany as the third largest global economic power and could replace the U.S. as the largest in as few as 12 years. But, China currently has an environment of political unrest that may limit its continued rise in economic power.
"India, on the other hand," Reynolds said, "is the largest democracy with 100 million educated individuals. In the U.S., 20% of Silicon Valley startups are by Indians, young people. I'm betting on the elephant to outrun the dragon," Reynolds said referring to a book by Robyn Meredith about the two foreign countries' rise in economic influence.
Although the U.S. has had 5.6% real economic growth through the beginning of 2006 and corporate balance sheets are the best they've been in 50 years, the consumer is developing problems, Reynolds said.
"Over five years, a family of four has seen a 4% decline in net income in an inflation-adjusted economy. Consumers haven't really had a good pay raise in several years; taxes are up, health insurance costs are up, and spending is slowing. The residential housing slowdown has dropped a half-percent off GDP growth."
"Last year," Reynolds continued, "seven percent of personal income spending was from home equity loans. The price of homes is going up, and consumers can't continue to extract equity from their mortgages.
Reynolds predicted 2.6 percent GDP growth next year, concluding, "The economy will be okay in 2007, but there are real concerns for 2008." –[email protected]
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