The Outlook Reasonably Optimistic
GRAND RAPIDS — Although 2004 was actually a "wonderful" year for the economy, it seems it just didn't feel that way to most Americans.
Last year's economy was what Carl Tannenbaum, chief economist of LaSalle Bank and Standard Federal Bank, called a "Rodney Dangerfield Economy" because it didn't get much respect.
Yet the economy grew by nearly 4.5 percent in 2004, U.S. factory output was at an all-time high and 2.2 million jobs were created — making it the best year for employment since 1999.
"This is especially important because it was the first Christmas season in four years that went forward without any new tax incentives from the government," Tannenbaum told a group of about 500 at the Grand Rapids Economic Club luncheon Monday. "Now that those have worn off and that mortgage refinancing is no longer the panacea that it was, if we're going to have a lot of spending activity, creating new jobs is going to be important."
Tannenbaum said consumer spending, corporate investment and the government deficit will determine economic performance in 2005.
Are consumers tapped out and in too much debt? Tannenbaum noted that retail sales are presently about 6 percent to 6.5 percent above where they were a year ago and holiday season sales were about 3.5 percent to 4 percent higher than the year-ago season.
"This certainly is not a sign that consumers are backing off, yet it could mean that perhaps we're on a spending spree that we can't sustain," he said.
The personal savings rate has been gradually ratcheting down over the last 10 years, and there has been a lot of focus on the amount of debt consumers have taken on, mortgage and other types of debt, he added. The rise in personal bankruptcy petitions reflects debt taken to the extreme.
But Tannenbaum doesn't think consumers are poised for a big fall because what the consumer savings statistics don't take into account is the appreciation of stock portfolios, retirement plans, and the value of people's homes.
"When you look at assets vs. liabilities there is still a great deal of equity left over. In general, the cost of credit is low and the amount of credit people have taken on is a very modest fraction of their wealth. Job gains and the income gains that go with them will sustain consumer spending."
Tannenbaum said the corporate balance sheet shows that companies have remained a little hesitant, in part because of consumer demand, compliance with the Sarbanes-Oxley Act and the geopolitical risks of international trade in a time of war.
"We're beginning to see signs that firms are becoming more aggressive and more confident as we move into this year."
Energy prices have made a dent in corporate wallets, too, but it's health care premiums that are significantly hindering business expansion, profits and hiring activity, he noted.
"Clearly, for both the private sector and the public sector, the medical industry is one that we're going to have to come to grips with, because it's coming on fast as the baby boomers approach retirement. It's getting very, very expensive."
Then there's the federal government's "battle of the budget." The Fed is on the hook for $32 trillion and counting. Medicare and Social Security are going to cost the nation $85 million for the Baby Boom generation and $45 million for the generation that follows.
"If we do nothing, our children are going to be paying marginal tax rates of about 65 percent to cover the benefits we'll be collecting in Social Security and Medicare," Tannenbaum said.
"We're lucky that that we haven't seen American interest rates go up, because when you run big deficits inevitably you have to pay more to finance them. The people financing these deficits are largely people overseas. They've been patient with us, but how long can that last?
"We have to show some backbone. We need to balance our books at several levels."
All in all, Tannenbaum said, he's reasonably optimistic about 2005's economic prospects. Real GDP growth is expected to be 3.6 percent, inflation will likely hover at 2.1 percent, unemployment is expected to decrease slightly to 5.2 percent and by year-end the Fed fund rate should be at about 3.8 percent, he predicts.