The domestic economy has been moving in fits and starts for years now. March marks the 58th month since the U.S. officially came out of the Great Recession, but while the stock market recovery has been robust, GDP growth and job creation have tended to lag.
Jack Ablin, vice president and chief investment officer with BMO Private Bank in Chicago, has some insight into where we’re going, where we’ve been, and what could get us on track faster. Ablin will offer an economic outlook to BMO Private Bank Clients at 4:30 p.m. March 19 at the Madison Museum of Contemporary Art.
Ablin is a former professor of finance at Boston University, the author of Reading Minds and Markets: Minimizing Risk and Maximizing Returns in a Volatile Global Marketplace, and a frequent contributor to CNBC, Bloomberg, The Wall Street Journal, and Barron’s.
We caught up with him to get his take on the current state of the economy, the business climate, the outlook for investors, and what’s on the economic horizon.
IB: About a month ago, you noted that the U.S. economy appears to be accelerating and the labor market is tightening, precipitating a rise in wages. Do you see this trend continuing?
Ablin: I do. I think that I see it not only in the data but also just in what I hear from business owners. Many business owners that I speak with say that they’re having a hard time finding qualified workers. So what I think is going on is that there’s somewhat of a mismatch between what the private sector is looking for and what our workforce has. But for those workers, those employees with skills, I think they’re in relatively high demand, and wages are starting to creep up for them.
IB: Do you think that will lead to more overall hiring, or do you think it just speaks to the skills gap we’re experiencing right now?
Ablin: I think it could lead to more overall hiring, but I think what we’re likely to see is more wage pressure first, just because of the skills gap. I could envision an environment where unskilled worker pay doesn’t go anywhere but [skilled] worker pay starts to move higher, and perhaps then there’ll be pressure for low-skilled workers to attain some training.
IB: Do you think so-called full employment, however you define that, is anywhere in sight?
Ablin: My sense is that because of the mismatch, we’re probably not far from full employment. I mean, that’s the problem. I think full employment, or the natural rate of unemployment, is probably higher than we think it is. Two things have been going on. One, the private sector is continually invested in productivity and so forth, and so the skills required to contribute to the private sector have increased, and at the same time we’ve shifted more toward a service-oriented economy, and our workforce really hasn’t been able to keep pace with those needs on the training side. And so as a result of that, the natural rate of unemployment, the unemployment rate that we could be at before we start seeing inflation, we’re probably close to that number already.
IB: Federal Reserve Bank of Philadelphia President Charles Plosser recently said the Fed may have to accelerate the pace of tapering. Do you anticipate that happening, and what would the repercussions be?
Ablin: I’m not sure that the Fed is going to accelerate the tapering. I think they do want to get off stage as quickly as possible. I will say that with each subsequent quantitative easing program, the economic impact has been less and less. I look at inflation expectations in response to these programs, and this last one … was actually greeted by lower inflation expectations, not higher, which undermines what the Fed is hoping to do with the program. So I do believe that they want to get off stage quickly. I don’t know if they need to accelerate it. But I also think they’re going to keep interest rates low for a long, long time.
IB: Just how much did the brutal winter affect business activity? Do you expect a strong rebound as spring approaches?
Ablin: Speaking to you from the epicenter of the polar vortex [Chicago], I think it does make a difference. Economists can seasonally adjust numbers, but I will tell you, on Jan. 7, the first day of the polar vortex that really hit us hard, there were towns in Minnesota that registered temperatures lower than what was recorded on Mars. So I do believe it is extreme. In fact, I think more than 11,000 flights have been canceled as a result of it. So I do think it certainly threw an economic monkey wrench into growth. The problem is we aren’t really going to know the full impact of the winter until probably May when we’re looking at April numbers. So it’s really sort of faith that we think the economy is continuing to accelerate, but we’re really not going to know until a few more months.
IB: Is the housing market finally on solid footing, and how confident can we be that we’ll avoid the irrational exuberance that preceded the Great Recession?
Ablin: I think human nature suggests that we’re not going to create two bubbles of the same asset class so close together. So I think between the last time around and this time around, more and more Americans are inclined to rent versus own. Lenders are certainly not looking to extend credit quite as easily as they once did, and so I think between the somewhat cautious buyers and somewhat cautious lenders, the U.S. housing market will likely be, from a credit perspective, pretty solid. That said, if you put interest rates, household incomes, and housing prices into a pot and mix them around, housing prices still look pretty cheap, so I do think that the housing market can sustain incrementally higher interest rates, slightly higher housing prices, and still be reasonably affordable.
(Continued)
IB: You’ve noted that America’s corporate tax rates — which are currently among the highest in the industrialized world — are affecting growth. Where do you think those rates should be set? Is there any chance that Washington will take action?
Ablin: Sure, where I’d like them to be set is zero, and the reason is more than 90% of all taxes collected in the U.S. are personal income taxes. It’s funny, we have the highest corporate tax rate in the world but we don’t collect corporate taxes. So that’s part of it, and I think because of that rate, two things happen. It just creates a number of distortions. Firstly, companies spend a large amount of money each year paying attorneys and accountants to try to avoid taxes. Secondly, a lot of the profits, particularly among multinational companies, are being shifted overseas, and we’re sending the wrong incentives. If we want to create incentives for investment and expansion, then I would suggest that we’d want to allow companies to keep their profits at home. I think in reality, the corporate tax rate should be set at where the effective corporate tax rate is right now, and that’s about 15%. But I think that if we set it at 15% and we eliminated the loopholes, that would be revenue neutral for the government, and I think that’s a good place to start.
IB: What else will you be addressing at your talk?
Ablin: What I’m going to be really focused on is, how do we evaluate the markets where they are right now? I think we have a relatively expensive S&P 500, at least by historical standards, but we’ve got, as I mentioned, a favorable economy, enormous liquidity, and momentum is strong. So I think if I start to see any of those conditions weaken at all, whether it’s the economy or just the market itself, I would use that as an opportunity to reduce our risk. But right now we’re still suggesting that investors stay in.
IB: Regarding the economy as a whole and from a business perspective, do you see many reasons to be optimistic, or any reason to be pessimistic?
Ablin: No, I see no reason to be either optimistic or pessimistic. I’m hopeful. I am hopeful that businesses will take all of this cash that they’re generating and all of the cash that’s on their balance sheet, or a lot of it, and use it to plow back into the business, whether it’s to expand, to invest in R&D, or to buy other companies. That’s really what I’m looking for. We certainly can’t rely on the consumer to keep driving economic growth. The economy has gotten very heavy for them, so I’d love to see the business side of our economy pick things up, and that’s the hope that I have.
IB: Everyone has their own theories about why this recovery has been so slow and job creation has been lagging. Do you have any of your own?
Ablin: I think a lot of it is sentiment; it’s just attitudes, especially among small businesses. It’s what I would call survivorship bias. It was always the prudent and conservative business owner that was able to survive the downturn, and it was their spendthrift and highly leveraged competitors that fell by the wayside. So now we’re left with a nation of prudent and conservative businesspeople, and I’m hopeful that those attitudes improve over time.
Click here to sign up for the free IB ezine — your twice-weekly resource for local business news, analysis, voices, and the names you need to know. If you are not already a subscriber to In Business magazine, be sure to sign up for our monthly print edition here.
