James Russell has a three-word rejoinder for those who are bearish on the prospects for a robust, job-creating economic recovery anytime soon: “Blah, blah, blah.”
Granted, that’s not exactly the kind of “phraseology” one would expect from an economist. But according to Russell, history tells us that even learned economists tend to underestimate the strength of unfolding recoveries. Russell, regional investment manager and senior portfolio strategist for U.S. Bank, is forecasting gross domestic product growth of 3.0 to 3.5% (initial reports peg Q1 growth at 3.2%) and monthly private sector job growth of 300,000 to 400,000 by mid-year. [Editor’s note: The economy created 290,000 new jobs in April, but the official unemployment rate rose from 9.7% to 9.9% because more people entered the workforce to look for jobs.]
While there are a couple of things on the horizon that could undermine growth, Russell is confident that the U.S. will avoid both a double-dip recession and the patience-testing characteristics of a prolonged, gradual recovery. “We think the economic output will probably be a little stronger than gradual,” he stated. “We do agree with the consensus that job growth will be gradual, but we’re probably on the high side of consensus thought there as well.”
Payroll Versus Household Survey
Russell, who was in Madison last week to deliver the bank’s forecast to private bankers, said U.S Bank believes the “dam is getting ready to break” on the jobs numbers. He noted that payroll employment numbers lag behind the household employment numbers; the latter takes into account self-employed people.
“The household employment numbers are really pointing to a much stronger recovery and a much vigorous employment situation than some of the payroll numbers are,” he said. “We think there are a lot of folks in that [household] category, and we think the payroll numbers are not accurately picking up all the employment that’s really going on out there.”
The payroll numbers said 162,000 new jobs were created in March, but one-third of them were temporary Census jobs. Still, more than 100,000 new private sector jobs were created, a sign that the economy has turned a corner; economists say 150,000 new jobs are needed each month to keep pace with population growth and to accommodate changes in the labor market. “We think April, May, June, will have a 250,000, 300,000, 400,000 jobs per month run rate as we hit the third and fourth quarter of this year,” Russell said. “A half million new jobs per month may be a little bit high, but we think something that is a multiple of what we’re producing now is very likely toward year’s end.”
He was quick to note these are private-sector jobs, not government jobs. He said as publicly traded companies report first quarter earnings, there is some indication that they have squeezed as much productivity as they can out of their existing workforce. In addition, there are faint signs of a hiring pick up already from the technology sector, and in spots in the financial, retail, and industrial sectors, which should broaden as the year unfolds.
Russell is well aware that his optimistic forecast is at odds with the more tempered predictions of people like former labor secretary and current college professor Robert Reich, who contends that it could be several years before the eight million jobs lost in the recession are recovered. “Dr. Reich is certainly a good, 12-pound brain, but he has been a pessimistic type, as has Dr. [Nouriel] Roubini at NYU and other very smart people out there who have underestimated the character of this economic rebound,” he said. “Certainly, this has been the worst recession since the Great Depression. I won’t argue that. It has been a tough meltdown. Eight million jobs have been lost, and I think companies will be very cautious.”
However, Russell noted that “we hear this every recession.”
“After the tech bubble, we heard the same thing. That is, companies will be very cautious to hire back workers, and technology will gradually replace workers and thousands, if not hundreds of thousands, of not a few million people will be permanently displaced,” he added. “These industries aren’t coming back. These jobs aren’t coming back, blah, blah, blah.
“This cycle has, frankly, many of the ear-markings of a regular type of rebound, with a few caveats. Slow job growth is always the earmark of a recovery. Again, I think that starts to pick up momentum as we move through the year.”
Consumer Driven
Another sign of economic progress is pure economic growth. Not only does U.S. Bank forecast annual growth in the 3.0 to 3.5 range, but the first quarter is likely to settle in at 3.5, following two consecutive quarters of expansion. Does that include improved business and capital spending? “That includes a lot of things,” Russell noted. “I think what we”re seeing right now is the re-emergence of the consumer. Certainly, business spending is likely to respond to that, as is employment, but [consumer] spending comes first.”
In April, consumer confidence reached its highest level since September of 2008, according to the Conference Board. Russell, however, noted that it’s not just about the domestic consumer because 40% of the S&P 500’s revenue stream is non-domestic. Activity levels are higher in emerging markets, which are strong trade partners for the U.S. “We feel that there is a combination, and it’s really the perfect storm,” he said. “You have government stimulus, low interest rates, a consumer that is starting to rebound a bit, and foreign demand really all working together to lift a lot of the economic metrics.
“Some of those things will fade as we move through the year,” he added. “Stimulus will gradually fade. We do think that interest rates will start to nudge up before too much longer, probably the fourth quarter or so, but we think the U.S. consumer gains momentum as we move though the year and we do think the emerging markets are pretty strong.”
Growth in emerging countries like China and Brazil is outpacing growth in the U.S. and swamping the anemic growth of Europe. The growing demand is helping U.S. manufacturers in the export arena, and it’s coming from actual units moving out the door, without much lift from raising prices.
China, he noted, will be world’s second-largest economy at some point by end of this year, surpassing Japan, while Brazil will be fifth largest economy in the world by end of 2012. Incorporating this new blood into the influential group of G-8 industrialized nations, which is includes the slow-growing European Union nations, might make some sense, he asserted. (They are already part of the G-20, a group of finance ministers of emerging economies established in the late 1990s).
“The demand is now in place increasingly by the consumer, and we think that cap ex (capital expenditures) and hiring will be the next things [to rise] as we enter mid-year and into the third quarter of this year. Those things will be very evident, we feel, as we progress through the year.”
Russell’s take on different economic metrics:
On the likelihood of a double-dip recession: “We would view the likelihood of a double-dip recession as very low, and only caused by an exogenous, non-economic issue — nuclear war, natural disaster, something along those lines.”
On the future course of inflation: “We think we’re probably seeing the lows for inflation in this business cycle during the second and third quarter of this year. We think there is sufficient slack in the economy that inflation can move a little lower than it is now, but we think as soon as the job numbers begin to lift a little bit — we’re already starting to see a little bit of wage pressure in the temporary employment area as well as in commodities — that inflation begins to pick up. We’ll probably be a little bit more worried about that as we reach the fourth quarter and into 2011, but we think right in through the next couple of quarters will mark the low point for inflation in this particular business cycle.”
On the possibility of hyper-inflation: “That is the $1 million question. With all the stimulus that is out there, that the Fed has thrown at the economy and has produced a very credible recovery, as well as the stimulus thrown at the economy by the Obama administration, which has been a very constructive force, we do wonder if inflation might get out of hand. That is probably our key concern, way over and above a double-dip recession, and way over and above anything else.
“The table is set, frankly, for a much higher inflation rate. We’re very, very hopeful that the Fed sees that as well. We feel that they do, and will take the steps necessary to avoid a hyper-inflation scenario. We think inflation in the 2, 3, 4 % range is a very likely scenario. Anything north of that, though, really concerns us, and that’s what we’re hopeful is avoided.”
His concern isn’t that the Fed lacks the tools to control inflation; it’s whether the Fed can see it coming fast enough. “One of the sister questions to hyper inflation is can the Fed start the withdrawal of all this stimulus soon enough so that the inflation seeds aren’t sown. We’re hopeful that they will. There is already talk of them selling their mortgage-backed securities into the open market, as well as taking rates a little bit higher, and toying with a variety of mechanisms. Not higher interest rates, but toying with a variety of mechanisms that might be able to avoid some of that monetary-based inflation because there is so much stimulus in the system right this minute.
“It’s a combination of the monetary stimulus that is in the system, and improving employment that gives us pause on the inflation question. I think that combination is going to be a very powerful in lifting inflation a little higher.”
On whether federal tax increases planned for 2011 will undermine the unfolding recovery: “Yes, we are concerned about that. We don’t know what the structure of those program look like, or the magnitude, but we are concerned that higher taxes will hit us as the recovery is gaining steam.
“More concerning to us is the very high level of federal and state spending and what some of the state budgets and the federal budget look like. That is a much more of a concerning, big-picture issue. We’re seeing what’s going on in Greece right now. That ought to be an absolute warning shot to every country around the globe. This, too, can happen to you.
“States are facing cutbacks due to mounting debt, which is very problematic. You cannot tax people enough to make up those budgetary shortfalls. The politicians have to cut back on spending and spend smarter. That’s much more of a concern than marginal tax rates going up five percentage points.”
Sign up for the free IB Update — your weekly resource for local business news, analysis, voices and the names you need to know. Click here.
