Delos Smith is senior economist for The Security Executive Council, a Fordham University economics professor, and president and chief economist for Delos Smith & Associates. Previously, he was the senior business analyst with The Conference Board, which issues a monthly consumer confidence survey.
H.L.: Has the way Congress handled the potential government shutdown shaken your confidence in the U.S. economy?
D.S.: No. I don’t think it’s going to change the economic outlook. The people will accept it. There’s nothing wrong with what they did. It’s just the process. If you lose the election the way the Democrats did, and you have a House of Representatives against so much of what the Democrats and the president believe in, you will have a very contentious process, because you’re giving veto power to all three sides. I don’t agree with what the Republicans want, but that’s what we voted for. The upside of all of this is that it has worked throughout all our history, and sometimes we have a hiccup. That’s what happened, and we’re going to have the same problem in May with the debt ceiling decision.
H.L.: What do you think of the U.S. economy in light of the latest job reports?
D.S.: We’re doing better, but it’s still a very sluggish economic system. Job growth of 216,000 is decent, but it is not as much as we would like it at this point in the economic cycle. We had 388,000 jobless claims in the week before last, and that is relatively high for the current stage of the business cycle. They should be around 325,000, 330,000. And there’s still a lot of fear out there. The consumer is not a confident consumer.
H.L.: How are the three major markets in our economy — housing, retail, and automobiles?
D.S.: Two out of three have come back relatively nicely. Retail sales have looked a little bit better than we had been thinking.
The automobile market has been running around the 13 million mark. This is much better than what it was when it was running 9 million in the recession. But 13 million is not the norm. It’s 16 million. So we have a ways to go. But it’s bounced back and is in relatively good shape.
The housing market has still not improved and is in very poor shape. We are slowly resolving all of the issues, but there are still a lot of foreclosures in many major markets. There are still a lot of financing problems. The financing is not there, so it’s very hard for people to get the loans they need. The standards are much higher, and the numbers reflect that. So housing starts are so low it’s pathetic. New homes are not doing much better, and existing homes also. There’s a lot of inventory. We’ve just not worked out the housing picture and the housing market is still in the doldrums.
What makes it so important is that you have to buy furniture and all kinds of accessories. Construction is in the doldrums. It all needs to be worked out before you have a better economy.
When will that be? It’s hard to know. There are a lot of bottlenecks, and so many of them are procedural.
H.L.: What do you think will happen in June when the Federal Reserve ends its $600 billion purchase of Treasury bonds?
D.S.: The Fed will see what is happening then. Part of it is looking at the housing market.
The Fed has been trying to keep long-term interest rates as low as possible to revive the housing market, so they may want to continue quantitative easing. It will be a major decision. They’re in a bind: all the challenges in the housing market, the foreclosures, the whole mortgage industry.
And they can’t keep interest rates at zero indefinitely, because it creates another set of challenges that they don’t want to face: It’s inflationary and puts pressure into the system. Look at food prices. They’re soaring, and we all like to eat. I’m stunned at how high the prices are.
Also, you’re using part of the food supply throughout the world for fuel, biofuel. Corn is one of those products. It’s a world issue. It might really slow the economic system down, because more and more is going into food, just as more and more is going into fuel. Gasoline prices are skyrocketing. In short, it slows the economy down. And that hurts consumer confidence.
H.L.: What’s the right way to deal with our deficit?
D.S.: You have to have tax changes across the board, and the key is entitlements and defense. In defense we have to think about the type of defense we want. There are also a lot of options in dealing with Social Security. And you have a lot of special tax exemptions, especially for mortgages, that could go.
The only way to do it is to put everything on the table, and when everyone is screaming then you have a balanced fair plan. But you can’t leave any major part out because that creates unfairness, and it becomes unbalanced. For example, tax cuts for the rich make it unbalanced.
I’ve been looking at federal budget problems for 55 years, and we still have not solved them. It’s very hard to get revenues and expenditures in balance. It’s easy to cut taxes, and then you get people who want all kinds of government spending. Also there are incredible regional problems, where you want cuts in some parts of the country but not in yours.
I was just in Washington and talked to a lot of Congressmen and senators, and they’re all trying to find ways to finance local projects, especially infrastructure problems. Roads are worn out, and bridges need work. So it looks like earmarks are definitely going to come back. There are too many local projects that need to be completed. The best way to deal with infrastructure problems is the excise tax, and raising gasoline taxes would be the best way to go, but that would be impossible to do because people resist it. If you need to get elected, raising gas prices is not the way to do it. So you procrastinate, and the highways get worn out further. And you have more congestion and more road rage.
But we are lucky to be where we are and lucky that we got out of our financial problems. We might be sluggish, but we’re lucky to be just sluggish.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.