Welcome to the Business Journal Archives
Search for articles below, or continue to the all new BusinessJournalDaily.com now.
Search
"Deficits, Energy Prices, Inflation Threaten Recovery"
"By Dennis LaRueYOUNGSTOWN, Ohio -- The economy will continue to grow this year, but not as much as in 2004. Energy prices will rise because the dollar will get weaker yet. Productivity will continue to hinder the number of jobs created although productivity has begun to slow, so the United States should experience greater job growth. And inflation, held in check so far this decade, should rise to 3.5% this year.These were among the highlights of a presentation Wednesday to local business leaders made by Anthony Chan, managing director and senior economist in Columbus for JP Morgan Fleming Asset Management, which oversees $790 billion in assets.Chan's presentation was sponsored by Bank One, acquired by JP Morgan Chase, and Packer Thomas & Co.The economist expects real gross domestic product in 2005 to grow 3.5%, down from last year's 4.4% figure, 10-year U.S. Treasury notes to have a yield of 5% at year-end, the Consumer Price Index -- a measure of inflation -- to rise 3.5% and the Standard & Poor's 500 (equity markets) to rise somewhere between 5 and 6%.2005 will be the first year since the recession ended in 2001 when GDP growth will not exceed the previous year's, Chan said. Short-term interest rates are rising. So are long-term rates albeit not as fast.Hindering growth is the federal deficit, which again will exceed $400 billion, Chan said. Last year's deficit was $413 billion. He sees the stock markets rising, unaffected by deficits.Employers' contributions to health-care and medical-care plans -- which average $7,000 per employee -- will help keep the deficit under control, Chan said, because employers and employers pay for many of these plans with pre-tax dollars. The price of medical care in the United States, he noted, is rising 6.8% annually, 2 1/2 times the rates wages are rising.Wages are rising so slowly, he noted later, that wages increases have been lagging the rate of inflation.The current accounts deficit, better known as the balance of trade deficit, has gone from less than 1% of GDP to 5.6% of the economy, the economist said, and the U.S. imbalance with China exceeds its imbalance with Japan. He sees the current accounts deficit rising "to above 6% before things get better." A weaker dollar has reduced the U.S. trade imbalance, Chan said, but "It takes anywhere from one to 12 quarters" before the benefits of a weakened dollar show up in the statistics. "When the value of the dollar falls, it's a year later before you see improvement in the economy," he said. "So you will see some improvement later this year." Ohio, heavily dependent on manufacturing, had an unemployment rate of 6.5% last year, well above the national average of 5.4%. Manufacturers have enjoyed such huge gains in productivity that they haven't had to rehire those laid off, let alone add to their rolls, he said. In the 1950s and '60s, Chan continued, productivity growth averaged 2.75% annually. Over the last 50 years, the yearly average is 2.3%. "This decade it has been growing at 3 1/2%," Chan said, "the fastest ever. That's why GDP minus employment growth is getting wider."But the growth in productivity is "slowing down," he continued. "It began last year and will continue this year," possibly leading to an increase of 2.5 million new jobs this year.The Bush Administration's predictions of job growth have often turned out to be overly optimistic with a net increase of only 1.56 million new jobs since the expansion began in late 2001. "Two and a quarter million new jobs were created last year," Chan said. "But there should be 5 1/2 million more by now. There's four million jobs that haven't been created" because of job losses in 2002 and what economists took to calling a "jobless recovery." "The question is: why haven't more jobs been created?" he said. His answer, the unexpected growth in productivity. A survey of employers of small and mid-sized businesses shows 80% plan to add to their work forces, Chan reported. But, while there will be gains in employment, "wages are rising very, very slowly."Turning to major sectors, Chan expects the growth in residential construction to slow as interest rates rise this year. "Interest rates are the most important variable" affecting demand, Chan noted. "Mortgage rates remain low today" and will the first half of this year. "In the second half the world changes as interest rates rise."For 2005, residential construction will reflect 3 to 4% more growth than 2004, he said, and the year will end flat. Commercial construction, on the other hand, is most affected by economic growth. "Interest rates are not as important and it will perform better in 2005 and '06 than residential construction." Equity markets won't do as well this year, Chan said, up only 5 to 6%. He freely admitted his predictions for last year were wrong. He forecast 8% growth on the S&P 500; it was up 8.9%. However, he pointed out, with the Federal Reserve raising rates -- he forecast 4% and they rose 4.4% -- markets tend to underperform.When the Fed raises rates, it often raises them too fast and hastens a recession, Chan said, noting that 70% of the time a recession follows too fast a hike in rates. This time, however, "The Fed is going slowly in raising rates, so maybe we'll avoid a recession."He also remarked on the transparency of the Fed's actions since Alan Greenspan became chairman, which he posits should delay the onset of the next recession. "The Fed is more transparent [under Greenspan]," he said. "They tell you what they're going to do" rather than delay the release of reports of the Open Market Committee three months and keeping economists and financial analysts in the dark. "Corporate earnings are headed in the wrong direction," Chan declared. They continue to slow and when the consensus among professional economists is 10.1% growth this year, he sees it closer to 9%. The historical average is 8%, he remarked. So earnings are "doing OK but slowing down."Contact Dennis LaRue at [email protected]"