Diane Swonk is the chief economist and senior managing director of Mesirow Financial, a diversified financial services firm headquartered in Chicago with $32.2 billion in assets under management. Her job entails working internally and externally with clients to manage economic risk.
She was previously chief economist for Bank One, and has served on several advisory committees to the Federal Reserve Board and its regional banks, and on the Council of Economic Advisors for the White House.
Widely quoted in the leading business press, Swonk spoke with HardAssetsInvestor.com recently about the global economic outlook and the future for commodities.
HardAssetsInvestor.com: Things feel pretty uncertain out there. What's your outlook for the U.S. and global economy in general, as well as the stock market and commodities?
Diane Swonk, chief economist, Mesirow Financial: There is a bigger risk to the economy than to the stock market at this stage in the game. The environment particularly in the U.S., but also in other countries, is that wages have been constrained while commodity prices have soared. In other words, companies have increased their productivity to offset the rising costs of commodities. That has allowed for a better maintenance of corporate margins than personal income, so it's been a better economy for Wall Street than for Main Street.
That said, we are seeing weakness in the U.S., and the whole idea of a "decoupling" of the U.S. and external economies is being debunked. Most of Europe is now following the U.S. in the economic slow-down with a two-to-three quarter lag ...
That's important because Asia has been shifting from a reliance on the U.S. to a reliance on Europe to drive economic growth. So, with Europe weakening, you will start see the weakness Asia with a lag as well.
HAI: But the Asian economies continue to chug along, demanding and consuming huge amounts of commodities?
Swonk: Yes, but we are starting to see an impact of high commodity prices there too. Many of the commodity producing countries and some of the big consumers like China, who have long subsidized energy prices, are starting to lift those subsidies. Ultimately that will impact demand---we will see the demand destruction capabilities of higher prices take hold.
HAI: Are there any parts of the world that are better positioned than others economically?
Swonk: It's a global economic slowdown with the exception of the Middle East, where the economies continue to accelerate in response to higher oil prices. Latin America also is doing reasonable well, with the exception of Argentina, which is likely to implode upon itself ... and revalue their currency, likely in the early part of next year.
Beyond that, some Central European countries like the Czech Republic and Poland are doing better than the rest of Europe. But Denmark is already in recession, Spain and the UK are close, and the U.S.---whether it is technically a recession or not---it certainly feels like one.
HAI: It's surprising that the pullback in the U.S. hasn't been worse.
Swonk: The tax refund has helped a lot. Those refunds have been spent much more aggressively than people expected. The unfortunate reality, however, is that they had to be spent aggressively to compensate for the pain of rising prices at the pump. Those checks are bolstering the economy today, but there will be a giveback. I think we will probably see one of the worst Christmas shopping seasons in two decades this year.
HAI: Where does that leave us with the U.S. dollar? You're saying that the outlook for the U.S. is dim, but so is the outlook for Europe. Will the dollar ever find a bottom?
Swonk: The bad news is that the U.S. is surging ahead of its peers. As much as inflation hawks are taking charge in the Federal Reserve--- a process that will be accelerated once Frederic Mishkin resigns from the Fed at the end of August --- it will still be difficult for them to tighten interest rates aggressively given the current economic situation.
Meanwhile, in Europe, there is not a consensus to support [ECB Chairman Jean-Claude] Trichet's recent efforts to raise rates. Many people think Europe's economy will weaken enough that the ECB will have to reverse course.
Part of the reason the ECB has been much more vigilant in fighting inflation is that, unlike in the U.S., Europe has seem some wage acceleration, so the bank is more worried about a wage-price spiral taking hold.
