From The Daniel Island News|
DI Economist Gives 2013 Forecast
By ELIZABETH BUSH
Dec 26, 2012 - 8:16:11 AM
When it comes to the state of the nation’s economy, this is our moment of truth. What we do with it will define the course of our future, for better or for worse. That was the central message shared with attendees at the 2013 Economic Outlook Conference presented by keynote speaker Stephen Slifer, owner and Chief Economist at NumberNomics, LLC.
“We can’t really have any more Band-Aids,” he told the crowd of nearly 200 gathered at the Daniel Island Club for the December 4 event. “It’s time to get on with it and start dealing with these longer budget issues that we have.”
Slifer, a Chief U.S. Economist for Lehman Brothers from 1980 to 2003, began his presentation with the good news. He sees GDP growth picking up in the new year, from 2 percent in 2012 to 2.7 percent in 2013, with consumers and businesses as the primary drivers. Despite talk of a looming “fiscal cliff,” consumer sentiment is the highest it’s been since the recession, he said. The stock market has also been on a steady climb since the dramatic lows of 2009.
“It hops around, but basically it’s been a straight line upward,” added Slifer. “What that means for us as consumers is that we are getting back a lot of the net worth we lost during the recession.”
The housing market is also showing excellent signs of recovery, he told the group. Home prices remain more affordable than they have been in years and record low mortgage rates, now at 3.4 percent, are expected to continue to drop.
“If you combine those lower mortgage rates with this very sharp drop in house prices that we’ve seen… housing is the most affordable that it has been any time in the last 40 years,” said Slifer, who also served as a senior economist for the Board of Governors of the Federal Reserve for ten years.
As home prices begin to inch upwards, those who have been upside down in mortgages can begin to rebuild equity, and there will be fewer foreclosures and short sales in the pipeline.
“With respect to the consumer, maybe there is some ample justification for feeling pretty good,” Slifer added.
The same is basically true for businesses, he told his audience. Companies are growing at 6 percent, while business loans are climbing at a 13 percent rate. In addition, corporate bond rates are the lowest they’ve been in 50 years and cash levels “have never been higher,” Slifer said.
“The rise in the stock market helped corporate America. Corporations during the recession became lean and mean. They cut costs, boosted productivity and corporate profits today are soaring to record high levels…These guys have been raising a ton of money…but because they are worried about a recession, they are kind of sitting on it.”
In fact, he added, despite the cash influx, investment spending has not been taking off as some might have expected.
“The only conclusion I can come up with is that it’s uncertainty,” he said.
That uncertainty appears to be complicating matters across the board, and is largely fueling most of the country’s economic worries. Lingering questions over tax rates, the complexity of the tax code, possible changes to tax laws, health care costs, and regulatory burdens are each adding their own level of concern to economic instability.
“Most of this stuff has been imposed on us by government and it’s having an effect,” Slifer added. “It’s slowing the economy down. If the government created this stuff, it strikes me that they could get rid of it just as easily as they put it in.”
Next month, tax cuts put in place by former President George Bush are set to expire, Slifer explained, thus creating the infamous “fiscal cliff” that has garnered so much attention in recent weeks. Three years ago, a fiscal stimulus pumped $787 billion into the economy, stopping the country’s “death spiral,” said Slifer. The changes set to take place in January will do the opposite, he added, at a cost of $640 billion. So what happens if this is allowed to play out, and the growth trend of 3.5 percent is combined with a four percent loss due to the cost of the tax cuts?
“We’re back into a recession,” Slifer warned. “And that is clearly not a good thing…. The stock market takes a powder, consumer and business confidence gets whacked, net worth declines again, just when you thought you were out of the hole. We’re losing jobs, unemployment is back to 9 percent.”
But Slifer is confident this scenario can be “easily avoided.” He is optimistic that Republicans and Democrats can work together on a solution, despite the gridlock they have been experiencing in recent months.
“Suppose we just extend those tax cuts on the middle class for another year, we don’t let the alternative minimum tax go up for another year, we postpone the cuts in defense for another year?” he asked. “Well, suddenly we’ve cut the negative impact of the fiscal cliff more than in half…. You end up with a growth of something like 2 percent. Not great, but it’s about like what we had last year, and it’s certainly a whole lot better than letting us slide back into recession.”
Doing this will help, he admits, but it won’t solve the nation’s long-term problem – an additional $5 trillion debt amassed by the government over the last four years. Slifer painted a gloomy picture of what would happen to the country’s debt to GDP ratio if an action plan is not implemented. Since 2008, the ratio has gone from a “very comfortable” 35 percent to about 75 percent. In 10 years, Slifer predicts it will be at 90 percent.
“Most economists would say if you get to that level, you’ve got a problem. That’s a danger level. “
Add in a massive influx of baby boomer retirees who will be drawing on Social Security and Medicare, and by 2035 that debt to GDP ratio could hit an alarming 186 percent.
“Any way you slice it, that’s an issue,” Slifer added. “…Think Greece.”
Slifer cited the work completed by the Erskine Bowles Commission, a bi-partisan group appointed by President Obama, as providing solid and sound ideas for economic reform. The commission has made a number of recommendations, including lowering tax rates (individual income taxes would rise), eliminating tax deductions, putting discretionary spending back to where it was prior to the recession, and getting rid of earmarks. They also tackled entitlements, which make up 62 percent of government spending, by suggesting a reduction in benefits for higher income people, a gradual increase in the retirement age, an increase in the payroll tax maximum, and an increase in the eligibility age for Medicare.
“If you adopt everything that these guys talk about in this commission, the ratio drops to a very comfortable 40 percent by the time we get to 2035, a manageable debt burden,” Slifer said. “…If I thought that would be the outcome, I’d vote for it in a heartbeat.”
Slifer is optimistic that politicians will come together do the right thing.
“If that’s the world we can generate for 2013, and at the same time manage to solve our longer term budget issues, that’s a pretty good year. That’s a spectacular year. What we need is for our politicians to seize the moment. This is it. It’s time to do what you’ve been wanting to do. If you can do that, and do what’s right for America, 2013 will be a very good year indeed.”
Slifer’s presentation was sponsored by the Charleston Digital Corridor, the Charleston Regional Business Journal, the Daniel Island Business Association, the Daniel Island Town Association, Wells Fargo Advisors, and NumberNomics.
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