The Ottumwa Courier

October 24, 2012

Economy experiencing ‘modest growth’

Economic forecast depends on fiscal cliff

Courier Staff Writer

OTTUMWA — The nation’s economy is experiencing “modest growth” at the moment, though that could change by this time next year.

Jon Augustine, chief investment officer for BTC Capital Management, described to an Ottumwa audience Tuesday where the nation is in terms of economic growth and a possible forecast of the economy next year by looking at what the nation has experienced in the last few decades.

In the last 32 years, the United States has experienced four recessions, he said. From 1980-82, the nation hit the “double dip recession” stemming from high energy prices due to the Iranian Revolution and a tight monetary policy.

From 1990-91 during the Gulf War, the U.S. experienced “oil shock,” and the Federal Reserve raised rates to counter rising inflation.

In 2001, the Dot-com bubble hit, as well as the terrorist attacks on Sept. 11. And from 2007-09, the nation experienced the credit crisis and subprime loans.

Augustine looked at how much the economy recovered in the years following each recession. The recovery following 1982 was the best, at 18.1 percent growth three years later. The nation is currently experiencing the slowest recovery of the four recessions, at 6.8 percent.

“It’s not surprising to anyone that the current recovery is more sluggish than previous recovery periods,” he said.

The nation is experiencing “modest growth” right now.

“We like words like ‘robust,’ but we’re stuck with ‘modest’ and ‘tepid’ right now,” he said.

And an uptick in inflation is working its way out of the system, he said. Interest rates have been very low and he expects that will continue.

Unemployment is a huge contributor to how the economy fluctuates, he said. As of Sept. 30, the nation was sitting at 7.8 percent unemployment, with Iowa below that average at 5.5 percent.

Compared to the state, Wapello County and Ottumwa were sitting at 7.6 percent and 8 percent unemployment, respectively, as of Aug. 31.

“Characteristics of this recovery show improvements in unemployment but they’re very slow and gradual,” he said.

Looking at previous recessions, he said the 2009 recovery was unique in that unemployment actually rose as the recovery began, instead of decreasing after previous recoveries.

At the peak of the 1982 recession, unemployment sat at 11 percent, the highest of all four recessions at their peak.

In terms of employment, though, the nation experienced a very severe dropoff in the last recession.

“You probably have a number of people who lost their job who said, ‘I’ll just retire,’” he said.

Before the recession was in its stride, there was a peak of employed individuals in the U.S.

“To expect it to rapidly move back to that number, it’s not going to happen,” he said.

Housing was also affected by economic highs and lows.

Average home prices spiked from 2005 to 2007, which led to the severity of the downturn in 2008 and 2009, he said. Iowa, on the other hand, had a much steadier and less dramatic increase in prices.

“We’ve seen stabilization and improvement in average home prices,” he said. “Single family housing is the biggest driver of residential building permits in Iowa.”

And while consumer confidence has improved since the recession, investors haven’t felt the same way.

“Part of that can be attributed to the improvement in housing,” he said. “Despite the fact consumers are seeing a better economic picture today, investors are not.”

Some of their doubt can be linked to the upcoming elections and the “fiscal cliff,” he said.

The fiscal cliff refers to what will happen if certain laws are allowed to expire and others allowed to move forward at the end of the year, including sunsetting of the Bush tax cuts, expiration of the payroll tax holiday, emergency unemployment benefits and Budget Control Act spending cuts.

“If these are allowed to be fully implemented, it will take us back into a full recession,” he said.

Out of the four, the payroll tax holiday is the most likely to end, he said.

With the payroll tax holiday likely ending, J.P. Morgan’s GDP growth forecast for the first quarter next year has been downgraded from 1.5 percent to 1 percent, and 2.25 percent in the second quarter to 1.5 percent, according to the Washington Post.

This would mean a $125 billion reduction in the nation’s disposable income, Augustine said.

Augustine said J.P. Morgan believes only some emergency unemployment benefits could go away and Budget Control Act spending cuts will not be fully implemented.

“In interpreting how big the drag [of GDP] varies, most are under the consensus that the payroll tax holiday will end at the end of the year, but the rest they don’t think will be fully implemented,” he said.

While he doesn’t put a lot of emphasis on politics in terms of economic outlook, Augustine laid out a graph of stock market returns in terms of political party control. The highest return, 17.2 percent, occurred when there was a Democrat president and Republican-controlled Senate and House. The lowest return, 5.7 percent, occurred when there was a Republican president, Republican-controlled Senate and Democrat-controlled House.

“The president is only one part of the government,” he said. “These aren’t statistically relevant because it’s a small sample, but you get a sense of how different combinations of parties impact stock market returns.”

Economic summary:

• Positive GDP growth anticipated domestically and globally into 2013.

• Base level of stabilization seen in recent housing data expected to continue.

• Risks to economic growth outlook include further deterioration in Europe, hard economic landing in China and the fiscal cliff fallout.

— Courtesy of BTC Capital Management

Economic summary:

• Positive GDP growth anticipated domestically and globally into 2013

• Base level of stabilization seen in recent housing data expected to continue

• Risks to economic growth outlook include further deterioration in Europe, hard economic landing in China and the fiscal cliff fallout

— Courtesy of BTC Capital Management