Expect The Economy To Slow

May 27, 2005
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GRAND RAPIDS — The economy is growing, but it looks like 2005 will not measure up to 2004.

"The economy on a national level is going pretty darn well," Mitchell Stapley, chief fixed income officer of Fifth Third Bank, told a record crowd of 330 Tuesday at the Fifth Third economic and financial outlook luncheon at Frederik Meijer Gardens & Sculpture Park.

Stapley said he expects economic growth to be close to 3.5 percent, which is modestly softer than 2004.

One of the main issues is how the economy has transformed from manufacturing-based to a service-based.

"About 83 percent of the jobs in the country are related to the service industry; 11 percent are related to manufacturing," he said.

One concern is the status of General Motors and Ford Motor Co. stocks. "The market is saying that GM and Ford are riskier credit," he said.

But looking on the positive side, Stapley said GM and Ford have more assets than most companies in this position.

"These companies are in much, much, much better condition today than the average company that goes into the high-yield spreads," he said.

Though Stapley expects stocks to outperform other asset classes with returns in the mid to high single digits, he said the Federal Reserve System, inflation, corporate profits and the price of oil will be major issues for the stock market to deal with this year.

"Investors should expect single-digit returns in the intermediate term with dividend income becoming a more important component of total return," he said.

Stapley said though gas prices are high, with inflation adjustment, prices are not as high as they were in the early 1980s during the oil strike. "It wasn't as bad as it was back then," he said.

Overall, vehicle sales are down, but it's not just the sales that GM and Ford have to deal with. The companies have to find ways to become more productive but that is difficult considering that the hourly compensation of an employee is $31.67 compared to China's 90 cents. The hourly production labor cost including health benefits is projected to be $62.48 in 2007 for the United States

"When we look now at China paying 90 cents for hourly compensation, I really have some doubt we can be 35 times this productive at our auto manufacturing plants," he said.

GM and Ford also will have to deal with paying retired employees. GM has 2.65 retirees for every employee working. Stapley said compared with President George W. Bush declaring Social Security in crisis when there are three workers supporting every one retiree and in 35 years there will be two workers supporting every retiree, GM is truly in a crisis.

Though there has been a decrease in manufacturing throughout the nation, Stapley said there are some industries, such as recreational products, information technology, manufacturers supporting the health-care industry and those supplying the foreign automobile manufacturers that have transplanted into the United States, that are still doing well.

Stapley also touched on the housing market and said although Michigan housing prices have risen by 5.28 percent, that is small compared to states like Nevada, where the prices rose by 35.78 percent. Stapley said there have only been six quarters since 1985 when the average United States home prices have fallen. There have been more severe problems in markets such as New York, Houston, San Francisco and Boston

Stapley said he believes the rise in interest rates will be less severe than the market is currently discounting and upside earnings surprises will hold the key to better than expected equity returns.    

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