Focus and Banking & Finance

JPMorgan Chase economist encouraged by global economy

Anthony Chan will be in Grand Rapids this week to talk to private clients.

May 17, 2013
| By Pete Daly |
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JPMorgan Chase economist encouraged by global economy
Chan

The global economy ultimately affects individuals — especially high-net-worth individuals whose personal wealth and business capital is subject to constant economic changes on the other side of the globe, as well as the other side of Michigan.

The good news is that the global economy is going through a healing process, in the opinion of Anthony Chan, chief economist for Chase Private Clients, a division of JPMorgan Chase.

Chan will be in Grand Rapids Wednesday to make a presentation on the global economy to some of the bank’s private clients in West Michigan, who are mainly prominent, high-net-worth individuals.

Chan is quoted often in the news media, including The Wall Street Journal, Barron’s, The New York Times, The Washington Post, Chicago Tribune, Los Angeles Times and Investor’s Daily. He appears monthly on CNBC and other media outlets such as Bloomberg TV and public television’s “Nightly Business Report.”

Chan told the Business Journal he believes the global economy is “going through a healing process,” although some parts of the world are doing better than others. There is faster economic growth in Asian countries, especially compared to Europe, he said. But central bankers around the world are working diligently to accelerate the healing process, he added. The European Central Bank has said it will do whatever it takes, and demonstrated willingness to lower interest rates, along with other options, if economic conditions there do not improve.

One of the strongest areas in the global economy is Asia, where the economy is being rebalanced toward a larger consumer sector.

“The consumer sectors in Asia offer great potential” for the world economy, Chan said. There is some potential in the U.S., too, he added, noting that discretionary sectors such as automobiles are doing a little bit better.

“I think we are starting to see early signs of renewed capital spending,” too, he said, citing truck and car sales as those relate to both consumers and business.

The U.S. housing market is “on fire,” he said, due to accumulated years of repressed demand, lower mortgage rates and home prices that are increasing again — all of which are very much in the minds of prospective home buyers these days.

“In some markets, you’re even seeing shortages” of homes, said Chan, who predicts the expansion in the housing sector will continue to increase.

Home construction, of course, was a disaster zone in the Recession, with periods of housing starts that were at an annualized rate below a half million.

“Now we’re hovering in the 1 million range, and I think that, by the end of the year, we will probably see housing starts exceeding 1 million — maybe 1.2 million,” said Chan.

The U.S. Census Bureau and the Department of Housing and Urban Development, in their joint construction report on privately owned new residential units during March, said the seasonally adjusted rate was 902,000. That was about 3.9 percent below the February rate but more than 17 percent above the March 2012 estimate.

Building permits for single-family homes were estimated at an annual rate of 595,000, about one-half of 1 percent below the February rate.

Both the Associated Press and Reuters carried reports in early May that the Big Three in Detroit posted higher sales in April, driven by rising demand for larger vehicles such as SUVs and pickups. The increase was in spite of high unemployment and mixed economic signals. Ford F-series pickups sold at a rate 24 percent higher than April 2012, and Chevrolet full-size pickups were up 28 percent, with much of the demand believed to be reflecting new activity in the home construction industry, among others.

Chan predicted office furniture is “going to show further signs of life” in the near term, another sign that U.S. business is getting back on its feet.

He said the accessibility to bank capital for business is “absolutely” improving, citing a report from the Federal Reserve in early May that said “banks or financial institutions are easing their loan standard. What that means in plain English is, they are making it much easier to borrow money.”

The April issue of the Senior Loan Officer Opinion Survey on Bank Lending, published by the Federal Reserve Board, states that domestic banks, “on balance, reported having eased their lending standards and having experienced stronger demand in several loan categories over the past three months.”

A “relatively large” fraction of domestic bank officers said they had eased standards on commercial and industrial loans, and a moderate-to-large fraction said they had eased many terms on C&I loans to companies of all sizes. The banks said they did so because of increased competition, with a reported increase in demand for C&I loans.

“Hopefully,” said Chan, the financial institutions will be “better able to meet the increasing demand that’s going to result as the economy continues to improve.”

Chan said he and his associates at JPMorgan Chase are expecting U.S. economic growth of 2 percent but that the rate is “kind of misleading” because of the negative headwinds facing the U.S. economy.

By “negative headwinds,” he said, he is referring to issues such as the payroll tax increase, and now the Sequester that is impeding federal spending.

“All those things, frankly speaking, are probably subtracting about 1.5 percent from economic growth in the U.S. If we didn’t have those negative headwinds, we would probably be growing about 3.5 percent. So I would say that 2 percent growth — with all those negative headwinds we have — is probably not a bad thing,” said Chan.

“And finally — this is very relevant for Michigan — the 24-cent decline we’ve seen in gasoline prices since the peak at the end of February is going to introduce quite a bit of purchasing power to the American people. My estimates suggest that every penny that gas prices go down, it adds $1.4 billion in purchasing power for consumers. If they’ve gone down 24 cents, that’s about a little over $33 billion, so think of that as an injection or a stimulus or tax cut — the same impact.”

As for the economy today, Chan reminds people that a major factor that hurt the U.S. economy so much was “the massive loss of wealth we had during the financial crisis. We lost close to $16 trillion in housing and equity values during the financial crisis. But as of the fourth quarter of last year, the Federal Reserve said we had gotten everything back but $1.3 trillion.”

Then there was the first quarter of this year. Chan said he has estimated that the increase of value in the equity market and housing prices from January through March was enough to gain another $3 trillion.

“So I think it is fair to say we got it all back. And that’s one of the reasons why the savings rate has come down, why people are buying cars and consumer spending has held up despite these negative forces,” he said.

Chan is a member of several economic forecasting panels, including the Blue Chip Monthly Forecasting panel, the National Association of Business Economists Quarterly Macro Panel and the Reuters, Bloomberg and Dow Jones Weekly Economic Indicator panels. From 2001 to 2002, he served on the Economic Advisory Committee of the American Bankers Association, which briefed the Federal Reserve Board twice a year.

Chan received his B.B.A. in finance and investments from Baruch College in 1979, and his M.A. and Ph.D. in economics from the University of Maryland. From 1985 to 1986, he was a doctoral fellow at the Board of Governors of the Federal Reserve in Washington, D.C. He has been a professor of economics at the University of Dayton and was an economist at the Federal Reserve Bank of New York from 1989 to 1991, then a senior economist at Barclays de Zoete Wedd Government Securities from 1991 to 1994.

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