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Economic forecast contains ‘two stories’

Top Comerica analyst says the weather is fine today, but storm clouds are gathering on the horizon.

January 18, 2019
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One of the nation’s top economists told a recent gathering of local business executives that economic conditions still are looking positive for 2019, but risk factors are “piling up” for a mild recession.

Robert Dye, senior vice president and chief economist for Comerica Bank, presented his annual economic forecast to West Michigan business owners and executives at the “Outlook on America Symposium” on Jan. 14 at the Pinnacle Center in Hudsonville.

Dye said when he gained the role of chair of the Economic Advisory Committee of the American Bankers Association this year, he worked with about 20 chief economists from the nation’s largest financial institutions to compile a group outlook to share with the Federal Reserve.

Contrary to his expectations, the group easily agreed there are competing twin narratives for the 2019 outlook: Growth will continue at a moderating pace this year, but risk factors are “piling up” for a mild recession in the next six months to three years.

Dye pointed to indicators such as stock market losses, bond volatility and flattening yield curves; weak housing sales; a softening global economy; rising wages and interest rates that could squeeze corporate profits; deteriorating corporate debt quality; uncertainty and slipping business confidence; political issues such as fiscal policy changes, including reduced government spending; the trade war; and lower oil prices.

“When we think about what knocks the U.S. economy back into recession, it’s never one event,” he said. “Even in 2007, 2008 we had multiple events hitting all at once. We had the global financial crisis, the U.S. housing market, the auto industry restructured and oil price shock — four events. We look for events to sort of line up, and looking out this year and into next, there’s at least some potential out there.”

Dye said the positive side of the narrative is most current economic indicators look good, including unemployment, job growth, hours worked, production, corporate spending and profits, inflation, personal income and home equity.

Most of these indicators are at “multi-decade highs,” Dye said, the best since the mid- to late-1960s.

The economy also is approaching its longest expansion in U.S. history — currently at 115 months, second only to the 10-year expansion from 1991 to 2001 — which has some worried. Dye said long expansions often foretell a recession not because slumps are on a schedule, but because “the passage of time allows imbalances to build up.”

Despite the risks, Dye’s baseline forecast is for 2.8 percent real GDP growth in 2019, down from his 2018 forecast of 2.9 percent real GDP growth.

While many of the cited risks are impossible to predict accurately, Dye said he is confident one number will plummet: January job growth.

“We gained 312,000 net new jobs in December. That was a whale of a number, really unexpected,” he said. “That’s not going to be the case in January. We’re going to go from a whale to a guppy. … The federal government shutdown could be a pretty sizable drag on the order of 150,000, maybe 200,000 or more jobs.” Dye said he will adjust his January jobs report to edit out the effect of a government hiring freeze.

On the whole, there are “far more jobs out there than we have available workers,” Dye said, and so he is looking to productivity — output per worker — to keep the economy moving forward and inflation low.

Dye cited U.S. Bureau of Labor Statistics data showing there are about 6 million unemployed workers, with about 7 million job openings, so the country has reabsorbed nearly all its available cheap labor — which means hiring requires luring people away from their current jobs.

“If you want to hire somebody, you’ve got to do it the old-fashioned way; you’ve got to steal them from somebody else, which means wages going up,” Dye said. “You’re paying for the fresh guns to come in and work for you, and that starts to impact your bottom line.”

Downward pressure on corporate profits will weaken business confidence, Dye said, meaning corporations will invest less on expansions, which in turn will depress consumer confidence, leading to a recession.

Regardless of when it happens, Dye said he believes the next recession will be nothing compared to 2008.

“It’s not an off-the-cliff scenario,” he said. “It’s more like 2000, 2001 where we have a soft/negative quarter and soft/positive, soft/negative. It didn’t go spiraling.”

He said the main reason for that projection is that banks are better capitalized and managed today following changes made during the Great Recession, which is “a huge, buffering stabilizing force.”

Dye said the Federal Reserve plans to ease interest rate hikes to two 25-basis point increases in 2019, down from the four increases it made in 2018 — a typical move when the Fed is trying to boost spending and stimulate economic growth.

The most recent Michigan Index Dye developed to track GDP growth at the state level used October numbers and showed payroll numbers were up and unemployment insurance claims down, housing starts and housing prices were up, industrial electricity demand was high, and auto production was up, as was hotel occupancy. Trade went down, and sales tax revenue fell.

“The good news is the Michigan Index has ticked up the last couple months,” Dye said. “The less good news is it’s very obvious (it’s) flattening out.

“Michigan was one of the strongest economies coming out of the recession … taking full advantage of the auto industry bailout. … (But) the Michigan economy is really flattening out as auto production has flattened out and some other indicators, as well.”

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