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Federal Reserve Bank of Philadelphia President Patrick Harker speaks at the 2020 Economic Forecast at the University of Delaware on Feb. 10. | DBT PHOTO BY JACOB OWENS[/caption]
With the nation’s economy humming, inflation low and the stock market touching new highs seemingly every day, economic prognosticators are divided into those who see bright days ahead for 2020 and those who are more worried that recession is creeping closer.
While wealth manager Michael Farr and economist Anirban Basu warned listeners at events this month about the risks of federal deficit spending and the potential re-emergence of inflation, Federal Reserve Bank of Philadelphia President and CEO Patrick Harker was more reticent to voice any major concerns.
Harker, who as a member of the Federal Open Market Committee (FOMC) votes on whether to adjust the nation’s benchmark interest rate, said he think the overall economy “is in good shape.” He envisions inflation returning to about 2% this year but thinks the FOMC should hold steady “for a while” on its current 1.5% to 1.75% range. Harker also believes job growth will fall from its robust pace of 225,000 in January to about 100,000 a month.
“That number sounds disappointing – compared with the stronger monthly gains we’ve seen in recent years – but it’s important to recognize that 100,000 jobs per month is more than enough to keep pace with the expected growth in the U.S. labor force,” he told attendees Feb. 10 of the 2020 Economic Forecast forum sponsored by Lyons Companies at the University of Delaware, where he previously served as president. “That’s one reason why I expect that the [nationwide] unemployment rate will stay below 4% for the next couple of years.”
With low unemployment combined with wage growth, Harker said that consumer spending, a huge driver of the national economy, should continue this year. He emphasized that the prospect of more homeowners refinancing their mortgages while rates remain under 4% would also reinforce consumer spending, with families having lower monthly bills and the ability to tap into their home equity through cash-back financing.
“The bank’s research – supported by industry analysis – suggests that with no change in mortgage rates, about 60% of borrowers will probably refinance this year, and over the next two years, we would expect an estimated $11.2 billion in added consumption from this refi activity,” he said, noting the average homeowner could save $2,000 in their first year.
That positive outlook driven by consumer spending was echoed at the Lyons event by Farr, president and CEO of Washington, D.C., wealth management firm Farr, Miller & Washington LLC, and a CNBC pundit.
“The American consumer, more reliably than any other citizen of the earth, spends whatever you give them. Give them money, they’re going to spend it. They’re fabulous at spending money. It's a bit shameful, but we really are good at it,” he said.
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Economist Anirban Basu addresses the New Castle County Chamber of Commerce on Feb. 3. | DBT PHOTO BY JACOB OWENS[/caption]
That spending is driven by a healthy job market said Basu, a well-known economist who serves as CEO of Baltimore-based
Sage Policy Group.
“America has added jobs for 111 consecutive months. That's an unrivaled, unparalleled winning streak in the nation's history,” he said, noting 22 million net new jobs have been created in the last decade or so.
Job growth coupled with low interest rates have helped lead to greater wealth for the average American compared to just a few years ago, Basu said in his annual economic forecast to the members of the
New Castle County Chamber of Commerce on Feb. 3 at the Chase Center on the Riverfront. He noted that it has also led to a building boom in the U.S. with single-home construction up 53% and office construction up 60% in the last five years.
Reasons to worry?
Both Basu and Farr noted that they have been puzzled by the lack of inflation amidst such a booming economy though.
“Over much of the last two years, my life has been spent unlearning economics, because I was taught that as unemployment in a society falls, inflation goes up – the Phillips curve,” Basu said. “Inflation in our society is about 2.2% year-over-year. Well that's just a bit of above the Federal Reserve’s 2% target. We don’t have a base inflation problem in America, which is amazing given that we have the lowest employment in 50 years.”
Farr noted that other factors like globalization, automation, weaker labor unions, a stronger dollar, energy efficiency and even more competitive pricing through services like Amazon have helped stave off inflation for now.
Basu opined that the American economy “may be growing for the wrong reasons,” explaining that federal deficit spending outpaced economic growth in gross domestic product last year.
“That’s going to get worse as it turns out. We have trillion-dollar deficits for as far as the eye can see. We’re running a trillion-dollar deficit per annum at full employment, which is very difficult to do,” he said.
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Investment fund manager Michael Farr addresses the 2020 Economic Forecast at the University of Delaware on Feb. 10. | DBT PHOTO BY JACOB OWENS[/caption]
Despite the 2017 federal tax cut and large spending bill, there wasn’t a multiplier effect, Farr added.
“If you spent a trillion or so dollars, you probably want to see $1.1 trillion to $1.2 trillion back – not so much here,” he said. “Most of the growth in GDP has been driven by the consumer.”
“That huge tax cut for corporations [led to] stock buybacks. Did they create more jobs? Not really. Did they build more plants and equipment? No. Why didn't they do it? There was a lot of uncertainty for those companies.”
Compounding the spending issue is the fact that the deficit spending is not being put into infrastructure that could prepare for the future, Basu said. Other looming issues include the estimated insolvency of Medicare Trust Fund in 2026 and the Social Security Trust Fund in 2035, he noted.
“Insolvency is not bankruptcy, but we have some major issues out there,” Basu said.
Basu also said that while many downplay the economic ramifications of an election year, he argues the vast difference in economic policy between President Donald Trump and a challenger like U.S. Sen. Bernie Sanders would exacerbate that threat more so than most election years. Proposals of wealth taxes and wholescale health care reform will likely force many corporations to push off spending until after the election.
“I think over the next 18 months, the risk [of recession] is arguably more elevated than any period since 2007,” Basu said.
Farr sees the rise in populism on both sides of the political spectrum as a risk to the American economy, as politicians seek to appease voters left out of a modernizing workforce by continuing deficit spending. That drives bond issuance backed by the Federal Reserve and Treasury, driving down bond yields and pushing investors toward the stock market, exacerbating the economic inequality that motivated voters in the first place.
“There will be a day of reckoning for the willingness to pursue incremental growth at any cost. There ain't no such thing as a free lunch. This bill will come due,” Farr warned.
By Jacob Owens
jowens@delawarebusinesstimes.com
