Vital Signs: Economic Predictions

The financial system appears to be stabilizing, the Dow industrials are inching up and big businesses are slowing the rate of layoffs. Is a recovery soon to follow?

The answer is a definitive maybe, according to five leading economists interviewed by Footwear News. While they all hope for good news, economists say a less-bad outlook doesn’t mean we’ve turned around. In fact, a number of issues, from commercial real estate loans to rising credit-card defaults, may prolong the recession. Additionally, some observers are worried about the huge deficits the U.S. government is running up.

“I’m concerned about deficits as the solution to everything — that raises a potential concern, which may come back to bite us,” said James Hamilton, professor of economics at the University of California, San Diego. “The key thing [for the Federal government] is to try to restore stability to the financial system. And there’s a trade-off there between trying to keep the current institutions solvent and operating, and trying to get to a system where everybody has confidence and we’re moving forward.”

To get a handle on what to expect in the coming months — and what it will mean for retailers and wholesalers — here’s what the experts had to say.

Bob Murphy
Professor of economics, Boston College
Claim to fame: Served as senior economist on the Council of Economic Advisers to President Bill Clinton
2010 forecast: Economic recovery will be well under way as unemployment begins to decline

FN: Is the recession gaining or losing steam?
BM: We’re bottoming out. As we move into the third quarter, we’re going to see the numbers on income and overall economic activity moving upward. But we’re going to continue to see unemployment rise, and that will happen through the end of the year, maybe into early next. Unemployment typically lags the overall level of economic activity because businesses tend to be reluctant to bring people back until they’re sure things are really on firm footing. Separately, consumer spending is extremely important. We saw an uptick in January; there was a good rebound in consumer spending after the complete disaster over the last half of last year. This quarter looks as though consumer spending will be moderate. I see consumer spending overall moving to about 2 to 2.5 percent on an annual basis in real terms.

FN: How does that stack up historically?
BM: Historically, consumer spending has been in the 2-to-3 percent range on average over recoveries. But usually, in the early stage of recovery, you see it bounce back more quickly. The big question here is do we get that rebound, or does it come later, or is it more spread out? I don’t see consumer spending, at this point, retreating — unless there’s some other shoe that falls.

FN: What will be the next big thing to hit the U.S. economy?
BM: The credit card issue is a potential concern. Although, the extraordinary policy moves by the Federal Reserve Board and the Treasury Department have helped to stabilize the credit markets. They’re no longer frozen. We’ve got lending resuming at least at some pace, though well below what we’d expect to see in normal times. To the extent that credit and, in general, the financial mechanism has eased up a bit, it will help cushion the blows that may come from credit card defaults.

FN: What key indicators are you watching?
BM: Retail sales and how that’s evolving. We saw some nice spring-back early in the year. Things flattened out, and the hope is that retail sales growth continues to be positive as we move through this year. I’m also looking at housing because we need to have the housing sector start to recover to build into the confidence of consumers. The other important thing is capital investment. Durable goods orders, they were up in April and May, relatively strong. They tend to bounce around a lot, but we’ve got some survey data from businesses that indicate that going forward, they’re hoping to pick up their investment plans. To the extent that capital spending comes back, that’s a good sign because that means businesses are expanding. It means they’re going to be hiring people down the road. It means those employees will have incomes to spend, and that all feeds through to the retail sector.

FN: Is the Obama administration doing enough to fix the economy?
BM: The stimulus plan is starting to have some impact. The various infrastructure projects and other things that are going to come online as we move through the year are going to become important in boosting spending and keeping people employed or putting more people to work. That will create multiplier effects through the spending chain. I would personally have preferred a little bit more of an emphasis on the spending side and less on the tax-cut side.

FN: What should retailers be focused on?
BM: I would be concerned about getting customers to be confident about the future. If people can be confident that things are moving in the right direction, that we’ve got a handle on this crisis and it’s starting to recede, then that’s what I would want to encourage. Any kind of advertising campaign should be optimistic about the future. Some advertising is focusing on how everybody is tightening his or her belt. That actually is the wrong message. The message has been, “Times are tough, you only have so much to spend, spend it on us.” Companies should instead say, “The future now looks better than it did five months ago. Things are moving in the right direction,” and try to build optimism.

Daniel Hamermesh
Professor of economics, University of Texas at Austin
Claim to fame: Pioneered the concept of the economics of beauty; guest Freakonomics blogger for The New York Times
2010 forecast: Slow economic recovery with national unemployment unlikely to fall more than 1 percentage point from 2009 peak

FN: Is the recession gaining or losing steam?
DH: It’s losing steam. I’ve said for many months now that the bottom would be around July. Clearly, the decline has slowed down. It may even have stopped. That said, a recession just means things are getting worse. [The end of a recession] doesn’t mean things are starting to get better.

FN: Is the worst behind us?
DH: It’s like when you yo-yo and you walk the dog. We might be walking the dog along the bottom for a long time. That would be very disturbing, but you just don’t know. I’d like to think that the stimulus, which really is huge, is going to start to have more of an effect. It hasn’t really had a big effect yet, but it does take time. The economy doesn’t move instantly. On the other hand, we have to realize this is not the Great Depression. Unemployment is not [at] 25 percent, it’s 9.5. It might break 10 percent, [but] we’re starting off with a very wealthy economy. It doesn’t mean it’s not a bad thing, but we’re not talking 1933 here.

FN: What indicators are you watching?
DH: I’m a labor economist, so I look at the unemployment rate [and] the components going into the unemployment rate. The one disturbing thing is that at the same time the unemployment rate has been rising, the labor force has not been rising at its normal capacity. Some people haven’t been entering the labor force because there are not jobs available. What that means is that when things start to pick up on the demand side again — and this always happens in a recession — the growth out of the unemployment will be much slower than it otherwise would be.

FN: What other figures are you keeping your eye on?
DH: The Job Openings and Labor Turnover Survey. It shows the number of hires and fires and quits in the U.S. economy. What happens in a recession is that the hires drop. You get the same rate of people exiting jobs, but fewer of them are replaced, and that causes the unemployment rate to rise. So if you look at the JOLTS report and start seeing hiring rates going up again, that’s the best sign the economy will pick up some more.

FN: Is the Obama administration doing enough to fix the economy?
DH: There will be some debt, sure. But compared with many countries, our debt-to-GDP ratio is not that high. Overall, I think the administration is doing a pretty good job. They inherited a mess.

FN: Will consumers ever spend the way they used to?
DH: Why would anybody think that somehow the entire nature of the economy has changed and that all we know of what’s happened in the past is no longer relevant? I just don’t believe nature makes jumps that way. I don’t see the basic consumer psychology changing.

James Hamilton
Professor of economics, University of California, San Diego
Claim to fame: Author of “Times Series Analysis,” a leading graduate text on economic dynamics
2010 forecast: Anemic growth

FN: Is the recession gaining or losing steam?
JH: Things aren’t getting worse as quickly as they were, and that’s what everybody’s cheering about. But for things to really turn around, we need improvements, not just slower rates of decline. I want to see employment stop falling. It needs to start going up. And, of course, consumption spending is going to be a key aspect of recovery.

FN: What are your biggest economic worries?
JH: Real estate prices are still falling, and there are some other shoes that could drop as well. Commercial real estate is a potential concern. And the international situation is something that’s bothered me for a while — especially the tremendous dependence of the U.S. and the Treasury on foreign lending week after week. If this was any country other than the U.S. and we had the deficit problems we have, a currency crisis would be right around the corner. But, it hasn’t happened because the U.S. dollar is the world’s reserve currency, and it’s not remotely in the interests of the Bank of China or the Bank of Japan to allow that to happen. But the fundamentals, in terms of the dollar flows, are worrisome.

FN: What will be the next big thing to hit the U.S. economy?
JH: The commercial mortgage-backed securities are a potential concern. Credit card debt [default] is a potential concern. I’m not saying that they are going to present big problems, but I will say that, for sure, they could.

FN: Is the Obama administration doing enough to correct the economy, or does it need to do more?
JH: I’m concerned about deficits as the solution to everything — that raises a potential concern which may come back to bite us. The key thing is to try to restore stability to the financial system. There’s a trade-off there between trying to keep the current institutions solvent and operating, and trying to get to a system where everybody has confidence and we’re moving forward. That’s a delicate balance to strike.

FN: Are there specific things the government should be doing?
JH: Job No. 1 is to keep the ship afloat. I worry that we go to quick measures that look like they don’t have a cost now but can pile up the load on the system. I’m referring to guarantees from the Federal Deposit Insurance Corp., and Fannie Mae and Freddie Mac and the Federal Reserve accepting a lot of obligations. It is something that reduces our flexibility to deal with these currency problems if they arise.

FN: Have consumers hit a spending reset button?
JH: We’re not going to get back to a negative savings rate, which is what we had a few years ago. That’s completely unsustainable. I also doubt that it’s going to stay at as high a savings rate as it is at the moment. It’s been coming in as high as 5 percent in recent months, having been negative for a brief time. My guess is that consumers will begin spending a little higher fraction of their income, but we won’t be going back to those very low levels of savings we saw a few years ago.

Jack Kyser
Founding Economist, Kyser Center for Economic Research at the Los Angeles Economic Development Corp.
Claim to fame: Predicted success of 1984 Summer Olympics, held in Los Angeles, despite boycott by Eastern Bloc countries
2010 forecast: Tough retail environment; will be well into the year before economy starts to recover

FN: Is the recession gaining or losing steam?
JK: It’s losing steam. There are a few favorable indicators showing up. But this has not been your typical recession, and we’re not going to have a typical recovery.

FN: What key indicators are you watching both in California and on a national level?
JK: We watch the unemployment rate because that’s the headline that gets everybody’s attention. We’re looking at what’s going on in the housing market. At least in Southern California, there are signs that the housing market is starting to search for a bottom, which would be good news. Then, we monitor what’s going on in international trade [and] the trends at the local ports, Los Angeles and Long Beach. We’re seeing a little bit more in the way of container traffic moving in and out of the two ports.

FN: What will be the next big thing to hit the economy?
JK: Commercial real estate. [For example] in California, a lot of hotels are getting into financial difficulty. The highest-profile example is the St. Regis at Monarch Beach, the site of the infamous AIG retreat. But also, you have the W Hotel down in San Diego, and you have the Marriot hotel in downtown Los Angeles, which is actually in foreclosure.

FN: Is the Obama administration doing enough to correct the economy?
JK: They’ve done quite a bit, but the problem is that everything in government moves very, very slowly, and there’s a lot of criticism that a lot of the stimulus money hasn’t really found it’s way into the economy yet. For the most part, I would say they’re doing stuff right.

FN: What are the most pressing issues for retailers?
JK: The short-term concern is to get customers in the stores shopping and not have to dangle money in front of them to get them in the stores. Consumers will come back, but it’s not going to be like it was. Consumers are going to be much more cautious in spending. We’re going to see a real savings rate. Consumers won’t be able to run out and get a second home loan, they won’t be able to use their credit cards, they may see credit cards taken away from them, so you have a whole new environment when it comes to consumer spending.

Lee Ohanian
Professor of Economics, University of California, Los Angeles; Director of the Ettinger Family Research Program in Macroeconomics
Claim to fame: Specialist in economic crises, particularly the Great Depression
2010 forecast: Hopes for a significant rebound

FN: Is the recession gaining or losing steam?
LO: There are some mixed signs. As a result of unprecedented Federal Reserve action, the banking system is in much, much better shape. And I don’t think anyone, say, six months ago, anticipated things would improve as fast as they have. Another spot that’s not particularly bright — but at least it’s not as gloomy — is that employment loss is slowing. On the negative side, since the American Recovery & Reinvestment Act passed, we’ve lost an additional 2 million jobs. That hasn’t worked as advertised, but we’ll probably know by the end of the summer whether we are, in fact, heading toward recovery or whether we still have another six months of recession ahead of us.

FN: How will this recovery differ from past recessions?
LO: In terms of looking for a turnaround, the consumer won’t be leading the charge this time. The consumer will probably be taking a back seat for a while. We’ve had a huge loss in wealth, particularly from housing prices, so when wealth falls, consumers spend less. The reason the recession has been so bad is because we’ve had this big drop in wealth, and then we’ve also had so much employment loss.

FN: Is the Obama administration doing enough to fix the problems?
LO: In conjunction with the Treasury and the Senate — and some of this goes back to before President Obama took office — the recovery in financial markets has been remarkable. To the extent that President Obama’s team has been involved with that, that’s been fantastic. I have been a critic of the American Recovery & Reinvestment Act; only about 10 percent of the ARRA funds have been spent. Anecdotally, this suggests that those funds, at least at the state level (a lot of these funds have just gone to states), are not being spent wisely. They’re not being spent on the programs that generate the largest increase in jobs or even that are consistent with President Obama’s goals about developing new energy sources.

FN: Do you think there needs to be another stimulus package?
LO: I don’t. Again, less than 10 percent has been spent. When government steps in with something this big, it’s like the big ocean liners, you can’t get the money in place all that quickly. If you try to, it often doesn’t get spent very wisely.

FN: What should retailers be focused on?
LO: It’s going to very different for very high-end retailers versus retailers that aren’t as high end. Long term, it’s important to develop a market niche that is attractive from the standpoint of consumers that are a little bit more choosy and might not be so willing to spend as they would have two or three years ago. People took a huge wealth hit, and that’s going to take a while to recover from, at least for many people. So consumers will definitely be bargain conscious and they’ll look for deals. Companies should look to keep themselves as liquid as possible because the financial system is looking much better, but it’s still not as easy to obtain the kind of financing at the terms they’re looking for as it might have been a couple of years ago. Manufacturers, meanwhile, who are pretty liquid and who have good cash positions are at an enormous advantage relative to those who are highly leveraged.

FN: Will consumers ever return to prior spending levels?
LO: Yes, but it’s going to take a while. At the end of the day, we’re all consumers. We all work because we want to put things on the table and give our families a high standard of living. We’ll get back there, but it’s not around the corner like it has been in previous recessions.


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