Delos Smith: Global Governance Issues Are My Main Concern

|
 |  Includes: DIA, QQQ, SPY
by: Harlan Levy

Click to enlarge

Delos Smith is senior economist for The Security Executive Council, a Fordham University economics professor, and president and chief economist at Delos Smith & Associates. Previously, he was the senior business analyst with The Conference Board, which issues a monthly consumer confidence survey.

H.L.: What do you think of the latest data on retail sales, consumer sentiment, industrial production, and business inventories?

D.S.: All the numbers have been very positive. Retail sales were up very nicely. Business inventories broke a record. They’re the lowest they’ve ever been, which means we’re in a very comfortable position. Consumer sentiment was a little disappointing, but all the consumer confidence measures are very sticky, which shows that the consumer still needs more healing. The consumer was very wounded by the financial market collapse and doesn’t understand why. You have a lot of anger, and there’s still a lot of nervousness.

However, the April nonfarm payroll report was really the first positive report we’ve had in years. The unemployment rate going up from 9.7 percent to 9.9 percent isn’t a concern because of the way the household survey, which determines it, is constructed. Also the next report for May should be very positive. I’m expecting it to show 300,000 to 400,000 new jobs, which will signify that we’re really in a recovery period, This will really help consumer confidence numbers. My conclusion is that we’re in a positive recovery.

H.L.: The U.S. stock market seems so terrified of the prospects for the debt problems of the European eurozone countries that strong corporate profits and other positive U.S. economic data can’t seem to counter the downdrafts. Is the reaction exaggerated?

D.S.: I don’t think so. The financial markets are global, and we’re starting to see how global they ar. So what happens in the eurozone, Britain, and the Asian countries is extremely significant to what happens in the U.S. equity markets.

Eurozone countries don’t want to bail out Greece, but when they look at the financial markets they see that the markets will collapse if they don’t come up with satisfying plans. In effect, the financial markets are creating government solutions. That’s why the Bush and Obama administrations poured trillions of dollars into the system to solve our financial problems starting in 2008.

H.L.: Do you think the austerity programs needed in Greece, Portugal, Ireland, Spain, and Italy can actually be implemented?

D.S.: That’s the absolutely open question: Will Greece change its cultural ways? Doing that is not easy. In a lot of Southern European countries there’s a lot of tax evasion, and Greece has a lot of wealthy people paying very little. What makes this so fascinating is that you’re talking about culture, and changes in culture are very hard. But in Greece the problems are so overwhelming, that we’ll see if there will be changes. It’s the same in Portugal, Spain, and Italy. Italy is an incredible example of tax evasion. It’s rooted in their culture and has been for decades and decades, even centuries.

But I predict they will make the changes -- enough to get by but with the utmost reluctance, holding their noses and not happily. They’ll do the minimal. What’s different from the past is that there will be an incredible amount of pushing, and they will not be able to get away with what they got away with before. But everyone is looking at Greece and looking at it hard. And that’s true of every country.

H.L.: Are you afraid austerity programs will impede a global economic recovery?

D.S.: They certainly could. That’s the extremely difficult management question: How do you put in these programs without hurting an economic system? When you see troubles you have to relax the austerity, and when they abate, you tighten. You squeeze and you let go, and you squeeze again. It’s like what you have to do with your children.

Governance issues are my major concern. You have an economic cycle in the U.S. and the world that is not doing that badly, but we need some serious governmance changes or we’re going to go back into a lot of difficulty. The question is whether there are government managers that can make the changes. In this country there's also a question of whether the president and the Congress can work together to make changes.

H.L.: So what’s ahead for U.S. economy?

D.S.: I’m very positive. The second quarter growth should be in the 2.6 to 3 percent range, and our labor force will look much better with more hiring. But the major question is what to do about lowering our deficit. We have to raise taxes and cut expenditures, and it will be no fun. If a plan makes everyone scream and holler, then it’s probably a decent plan. You have to have a lot of agony for a good plan to work, and Congress will be forced to do it. You have to do something better about the imbalance in revenues and expenditures. But they’re not going to do anything if there’s not enough pressure. I think economics and the world situation will create the pressure. Right now there’s not enough pressure to do it, but there will be. Will it happen this year or next year? I think it might be two years from now, and I don’t think that will be too late.

Disclosure: No positions