Guest speaker sees light at end of economic tunnel
by Clay Neely - email@example.com
The United States economy is gathering strength and accelerating, which, in turn, will spark the economic recovery in other countries around the world.
That was the message from Bill Cheney, chief economist for Manulife Asset Management. Cheney was the guest speaker for Newnan Mayor Keith Brady’s Economic Business Luncheon at the Newnan Centre on Lower Fayetteville Road on Thursday. More than a hundred local business leaders attended the event.
“The United States is the thousand pound gorilla in the world economy and everyone else watches what happens here, so we shouldn’t get so distracted by things elsewhere,” said Cheney. “It’s something to be grateful for since the U.S. economy is probably the place that’s doing the best.”
Cheney summarized that our country’s economic forecast is improving.
“Consumers are getting richer, corporate balance sheets are strong, banks have rebuilt capital so we can expect faster growth despite policy tightening by the United States government,” said Cheney.
According to Cheney, one of the factors that has been troublesome is the weather.
“In the last few months, we’ve had some disappointing economic data in the U.S., which has people worrying if this is just another case where the economy is slowing down again. My answer is that you shouldn’t worry about the weak data, it’s the weather,” said Cheney.
“I know that seems pretty intellectually lightweight, but weather is actually a huge deal. When you have a period of unusually bad weather, history tells us that it bounces right back. It’s seasonally adjusted data,” said Cheney.
Cheney noted that a key indicator of the economic recovery can be seen in our own backyard.
“We see momentum building in consumer behavior and quite significantly in state and local governments, which were a huge negative over the last several years. They don’t have the same freedom as the federal government to run massive deficits,” said Cheney. “Now it’s turned around. State and local government are finding themselves with more revenue than they expected.”
“The foot isn’t necessarily back on the gas pedal, but it’s certainly off the brakes.”
The political climate in Washington, D.C., has also been helping the recovery, according to Cheney.
“It’s shifted just enough that sabotaging the economy right now doesn’t feel like the right thing to do. So even though the pressure will be on to keep limits on spending and keep the deficit shrinking gradually, nothing will be done that’s so brutal that would derail the economic recovery,” said Cheney.
“It’s reassuring to see we got past the debt ceiling fiasco without doing anything foolish. We still have budget conflicts but that’s what supposed to happen. It’s a philosophical fight,” said Cheney. “I just hope they don’t do anything stupid in terms of shutting down the government, slashing important and productive programs — but you never know.”
Cheney touched on prevailing economic attitude following the crash of 2008.
“We’ve been through the last five years and you hear talk about ‘the new normal’ and I don’t think it is normal. We may have lived through it but it doesn’t make it normal,” said Cheney. “The truth is that the normal state of the U.S. economy is to grow and for the growth to accelerate as long as you have the spare resources.”
“We are in the process of turning a corner and we’re at a point where the economy could surprise us and be stronger than expected,” said Cheney.
Cheney also believes that in terms of investing in bonds, it’s time to throw away traditional gut instincts.
“There is a lot of money to be lost in bond investments,” said Cheney. “The rates went up for 30 years and they’ve gone down for 30 years. The fed has its thumb firmly planted on one side of the scales and still buying bonds, which means the risk is predominantly down. The outlook for equities are better than they are for bonds.”
“It’s not that you shouldn’t buy them,” said Cheney. “But it’s not a place to be just playing around with what you think of as traditional fun since the traditional rules surrounding them are now gone.”
The economic recovery of Europe is a year or two behind us but their recession is over, according to Cheney.
“Countries don’t always play nice together all the time and that’s really important. The Europeans have figured out that they need to get their banking system functioning smoothly and they need a harmonized system across the whole euro area,” said Cheney. “However, they just can’t get their act together on that. Who’s going to pay for it? Obviously the Germans, but they’re not too keen on it.”
“It’s one thing to bail out your own banks but imagine trying to get enough together to bail out the rest,” said Cheney. “However, I think they will and are committed to it, but who knows.”
According to Cheney, China is not a threat to the global economy as long as the country stays away from environmental catastrophes and natural disasters.
“The government has too much direct control to allow an economic hard landing,” said Cheney.
In short, Cheney predicted that Washington will not balance the budget too brutally, the EU will avoid a serious crisis, China will hit its growth targets, and “abenomics” will be broadly successful in Japan.
“The U.S. is still the most likely equity market to outperform, with economic growth and limited wage gains from corporate profits,” he said.
Cheney took questions from the audience, one coming from the mayor, who inquired into the ramifications of raising the minimum wage. “When I think about what the minimum wage represents in terms of someone trying to make a real living, it’s a pittance. It’s embarrassing to think a hardworking person would only make that much money. But, then again, there’s a whole population who isn’t making a living and are only making a few extra bucks,” said Cheney.
“I don’t think we should be raising minimum wage for teenagers working at McDonald’s, but then in our current economic conditions, we have 55-year-old people who were just laid off from their last job who are now working there. It comes down to a philosophical question,” said Cheney. “It’s a moral question, practically. I believe people should be paid more but I don’t think we should make it a law.”
Cheney addressed the issue of while corporate balance sheets are looking strong, what’s holding up companies from spending more money.
“During the recession, businesses didn’t need to spend extra money. They were short on sales, not materials,” he said. “In short, there is no incentive to spend when there is so much economic uncertainty abound. When you’re in our current economic climate, it’s not foolish to wait.”
Following the dismissal of the formal meeting, participants mingled and asked Cheney additional questions. Brady was enthusiastic about the event.
“For our first meeting, we had about 140 guests and he was a great speaker. We’re grateful for the turnout,” said Brady. “We hope to be able to grow the event over the years.”