Reading the Economic Crystal Ball
Mary Lou Santovec
P
ressure is building on the Federal Reserve to raise
short-term interest rates, and longer-term interest
rates are unlikely to rise dramatically, said Craig Dismuke,
senior vice president and chief economic strategist with the
Memphis-based Vining Sparks. Dismuke used a variety of
data sources to support his assertions in September at the
Community Bankers of Wisconsin’s annual Management
Conference & Expo.
During the second quarter of 2014, GDP rebounded
from the hit the economy took during the first quarter
thanks to the harsh winter weather. Just how bad was last
winter? It was the third coldest on record for some states;
others had the coldest winter ever.
The economy is stable, but it’s not accelerating. With
weakness in housing, consumer spending, and investment,
Dismuke predicts that it’s likely the United States will end
up with 2 percent growth this year, a far cry from the 3.6
percent GDP the economy has averaged since 1950. But at
least it’s on the right path.
Many Reasons to Raise Rates
There are several reasons why the Fed will need to raise
short-term interest rates: the economy is forming multiple
asset bubbles and the efficacy of easy credit is now question-
able. The labor market is tightening and there’s less risk of
disinflation. And, like the monarch butterflies that return
from their winter home in Mexico every spring, there
is no response mechanism other than bond
purchases for the next economic down-
turn, which everyone knows will occur
sooner or later.
“The Fed has kept interest rates
at zero for the past 47 consecu-
tive Fed meetings and the past
68 consecutive months.” These
low interest rates are hurting
consumers who rely on inter-
est income. Much like a row of
dominoes waiting for the first
one to fall, low interest rates
have kept seniors, who had
planned for a 6 to 8 percent
return on their money during
retirement, from leaving the
workforce. This delay prevents
newly minted college graduates
from finding their first jobs.
“The historical participation
rate for people over 65 in the
workforce is 18 percent. Today,
it’s 20 percent.”
With a growth rate of
200,000 jobs per month, the
trend is in the right direction, but it certainly lacks enthu-
siasm. Unemployment fell from a high of 10 percent to 6.2
percent for the long-term unemployed (those without a job
for more than 28 weeks) and to 4.1 percent for those unem-
ployed for the short-term (28 weeks or less). These numbers
are the lowest since July 2008.
Some Sectors Rebound, Others Lag
Two sectors that haven’t rebounded are construction
and manufacturing, which lost 3.2 million jobs. Meanwhile
health care has added 2.5 million jobs. This mismatch
points to unemployment being a structural problem, one
where monetary policy isn’t effective. Only cyclical policy
changes will move the needle.
During the Great Recession, some 9.23 million workers
left the labor force; with some 70 percent of them retir-
ing. Despite having time on their hands, don’t look for that
group to drive the economy. Older households don’t tend to
leverage. They also spend less than those in the peak earn-
ing ages of 35 to 54. This slows the velocity of money and
the GDP.
The trend toward people leaving the labor force con-
tinues, although at a much slower pace than
when unemployment was at 10 percent.
There’s not been a great migration of
those who were laid off coming back
in although the layoffs are down to
1.58 million, the lowest in the last
15 years. Even though the quit
rate is relatively low, companies
are having difficulty in find-
ing workers to fill available
positions.
Higher Wages on the Horizon
Lack of available workers will
likely result in higher wages.
“The more openings we see that
aren’t translating to job growth,
the more likely average hourly
earnings will tend to increase.”
Higher wages will keep pressure
on inflation and take away the
Fed’s worries about disinflation.
Consumers’ balance sheets
have been repaired from the
2008 crash but because consum-
ers haven’t seen their incomes
8
Wisconsin Community Banker
November/December 2014
Unemployment
Great Recession
Today
All
Long-Term
Unemployed
Short-Term
Unemployed
10.0 percent
6.2 percent
4.1 percent
