A co-founder of Economy.com shares his views on where the economic recovery is going.
By HELEN HUNTLEY
Published October 12, 2003
The economy seems puzzling to a lot of us these days. Growth is accelerating, but your neighbor still can't find a job. Real estate is hot but CD rates are not. How does an economist figure out what's going on in this unsettled economy?
For answers, Mark Zandi keeps an eye on everything from sales growth at Wal-Mart to the "baby boom echo," the population bulge of 14-year-olds.
Zandi is chief economist and co-founder of Economy.com, a forecasting and consulting company in West Chester, Pa., that operates a Web site of the same name. Zandi, 44, holds a Ph.D. from the University of Pennsylvania and is often quoted in television and newspaper reports on the economy. He shared his views with the St. Petersburg Times:
Q. What is your biggest concern about the economy?
Jobs. If businesses won't step up and resume hiring, that will short-circuit the nascent recovery.
Q. Why aren't we creating more new jobs as the economy recovers?
First, the widening trade deficit is weighing on jobs. The increasing prevalance of sending jobs overseas is part of that. Second, surging productivity growth. Perhaps most worrisome is the lack of business confidence. Businesses remain very reluctant to expand their operations by hiring or even investing. That remains the most significant threat to the still-fragile economy. Businesses are benefiting enormously from the productivity gains through better profitability, but they've yet to respond to that by hiring and investing.
Q. Will failure to create jobs put us back in a recession?
I don't think that's the most likely scenario, but it's certainly a risk.
Q. How much does the economy have to grow before we can get out of this stalemate?
I think we're close. Demand and production have improved. Profits are up. Business balance sheets are in better shape. All the preconditions for hiring are in place. We're now very close to seeing more substantive job growth. There are some tentative signs that the job market is at least stabilizing.
Q. What encouraging signs do you see?
Temporary jobs are up since the spring. Historically, rising temp jobs have been a precursor to full-time hiring. Hours worked by those in manufacturing rose last month, a good, positive leading indicator.
Q. How high do interest rates have to get before they pose a threat?
Given the fragile state of the recovery, it would be very negative if interest rates rose very much at all - a half or full percentage point would be too much for the economy to bear in its current state. Hopefully rates won't rise until we start to see some jobs.
The west coast of Florida is the one region of the country where lower rates are bad because so many people depend on interest income. Most everywhere else, people rejoice in lower interest rates.
Q. Do you expect interest rates to rise when the economy recovers?
Long-term rates, fixed mortgage rates will rise quickly once we see some consistent, substantive job growth. The fixed mortgage rate probably will go from 6 to 7 percent in a brief period. Short-term rates will be slower to rise. They're tied more to what the Federal Reserve Board is doing, and they'll be very cautious in tightening monetary policy. They may not tighten at all next year.
Q. Won't the slowing of the mortgage refinancing boom take some oomph out of consumer spending?
Yes. That's why we need jobs. Consumers are spending because they're able to borrow against their homes and they are benefiting from tax cuts. Both those things are ephemeral, temporary. We need job growth to fill the void when the benefits of tax cutting and mortgage borrowing wane.
Q. Are we seeing much impact from lower tax rates and reduced taxes on stock dividends?
We are seeing some benefit, yes, from the cut in marginal tax rates. It has put more money into household pocketbooks and consumer spending has picked up in response. Moreover, businesses are benefiting a bit from accelerated depreciation of various investments and greater expensing for smaller businesses. The dividend tax cut helps, but only marginally. It might help more in St. Petersburg than in the rest of country (because of retiree savings).
Q. How much impact will the slow economy have on the presidential election?
It will be the dominant issue of the presidential election if the job machine continues to sputter.
Q. What do demographics portend for our economic future?
The largest single-year age group in our population is 44-year-olds. There are more people 44 than any other age. The second largest single-year age group is 14. That's the boomers and the baby boom echo. A lot that will happen to us economically over the next decade will be determined by what those 14- and 44-year-olds will be doing.
The 14-year-olds will be demanding a lot of educational services, going to colleges and technical schools. The 44-year-olds will be using a lot of health care services. Those two industries should do well. That also has significant implications for housing. Rental housing will be in demand (as the 14-year-olds grow up). The 20-somethings are largely renters. It's the entry-level housing market that will suffer the most since the average age of a first-time home buyer is 34 to 35. Second and vacation homes will be very popular (as the 44-year-olds age) and that will help the west coast of Florida. The impetus for growth in this economy will slowly change over time from a consumer-driven economy to a more business-oriented economy.
Q. I understand that you have five favorite economic indicators you like to watch. Which one do you think is most important?
It depends on the environment. Today, the new unemployment claims are the most important because that's the reading on the job market. They've been around 400,000 (a week). We need to see something closer to 350,000 to 375,000. (Last week's report came in at 382,000.) All the indicators I picked are weekly indicators so you can monitor them on a timely basis. They are all very valuable pieces of information. Right now they paint a picture of an economy that's headed in the right direction, but still very fragile.
Q. What are your other favorite indicators?
Wal-Mart sales growth (for stores open more than one year). I'm just looking for that to accelerate. Right now, it's in the mid single digits, which is better than it was. It would be nice to see that rise toward the high single digits.
Commercial and industrial loans outstanding are still falling. It would be positive if they started to at least stabilize and perhaps rise. That's a good measure of whether businesses are expanding or not.
Mortgage applications (the Mortgage Bankers Association weekly survey) - all I want there is to see them remain strong. We need housing to remain vibrant until rest of economy kicks in.
The Consumer Comfort Index (a measure of the public's confidence from ABC News/Money) needs to turn up. Confidence seemed to improve after the end of major hostilities in Iraq, but more recently it's gone flat. It would be nice to see that improve.
Q. Has the business cycle changed fundamentally? Are we in a different pattern of recession and recovery than what we knew in the past?
There are many fundamental differences, most of which are good. Underlying productivity growth is stronger, the economy is less cyclical than in the past. We are becoming a more global economy and there's some pain involved in the process, but I do think that ultimately we will benefit from that enormously.
There are a number of unique features to this business cycle, but there's more similar about this cycle than different. This economy still experiences ups and downs. There are good times and there are bad. It's still affected by those animal spirits. People are euphoric in the good times and are very dark in the bad and that affects the broader economy. No matter how good our institutions and economic system become, it will be difficult to overcome those spirits.
