Lindsey Piegza is the chief economist for investment bank Sterne Agee.
Harlan Levy: Is the U.S. economy just trudging along favorably, or do you see a crisis looming?
Lindsey Piegza: I don't necessarily see a crisis looming, but I do see the economy just treading water at this point, which eventually will turn into a crisis if we don't see the U.S. economy gain significant momentum over the next several years. I think we would see a general decline in the overall annual pace of Gross Domestic Product, and at that point, without a significant change in policies, the economy could slip back into recession.
The concern should be that the economy is overheating at this point, not eking out 2 percent GDP, which arguably we should easily get 1 percent from population growth and 1 percent from productivity growth. So 2 percent is really the minimum bar when you're talking about a U.S. economy supposedly in an expansionary period at this point.
Q: Last time we talked you predicted 1.5 to 1.8 percent GDP growth for the year. Are you changing your outlook?
A: I think we're still going to be in that range. I might bump up the upper boundary to about 2 percent. But really, when you look at second quarter GDP coming in moderately, slightly under expectations, but certainly when you compare it with 0.6 percent for the first quarter of the year that's a step in the right direction. But you're talking about an average quarterly pace of 1.5 percent across the first six months of the year, meaning that in order to ramp that up for the annual pace, the back end, July through December, will have to show significant improved growth levels - 3, 3.5 percent - and I just don't see the underlying momentum in the economy at this point to suggest that we will see that uptick in growth in the next six months.
Q: Will 2016 be much better?
A: It could be if we start to see business development pick up, but again, going back to second-quarter GDP, 2 percent of the 2.3 percent was consumption. Now, we are a consumer-based economy, and we're happy to see the consumer happy and healthy out spending in the marketplace, but eventually that spending has to be generated by something else, business growth translated into further hiring, translated into further income growth. If we don't see those underlying fundamentals change into a more positive direction, the consumer is going to be forced to pull back markedly, and then that spells a general malaise for the U.S. economy.
Q: With wage growth stagnant, what's happening with jobs, and what's the impact on the economy?
A: Wage growth is very stagnant right now. What we are seeing is positive hiring gains month to month. Nonfarm payrolls are still very positive. But one of the concerns is that the momentum in hiring has slowed, meaning that at the end of the year we were hiring at an average monthly pace of 324,000, and that has now slowed to 220,00. It's still positive, but it's that loss of momentum, meaning companies are taking on fewer and fewer employees. And those employees lucky enough to find gainful employment are making 22 percent less than their pre-recession counterparts. This is continuing to put downward pressure on wages, as businesses continue to rely on temporary, part-time and low-wage employees.
Q: What do you think of the housing market?
A: The housing market is actually one of the bright spots of the economic recovery finally at this point. Housing has been categorized as quite slow by the Federal Reserve for the past several quarters, but more recently, with the uptick in activity, the Fed has characterized the housing market in a much more favorable light. We have home sales pick up, and prices pick up, as well as on the supply side, business starts and housing starts have both upticked. So I do see improvement here.
But one caveat is that while it's no longer that large net drag on the economy, it's also no longer the driver of the economy. It's contributing about half of what it once was during the housing run-up, but still a noticeable positive contribution to GDP. But it won't be enough to maintain trend growth just by an improving housing market.
Q: Inflation seems hardly noticeable. Does that and ultra-weak wage growth stop the Federal Reserve from raising interest rates this year?
A: At this point the question is what inflation? You're looking at inflation of 0.1 percent on the PCE and the CPI. The PPI is still in deeply negative territory. And now you have the concern of the slowdown in global growth, as we see commodity prices being hit.
A slowdown in demand translates into a slower demand for raw materials and commodities, not just energy. Look at aluminum, copper, steel. These are down 30, 40 percent from their 2011 peak. This puts further downward pressure on import prices, which are off already 10 percent in the last 12 months, creating an even more benign inflationary picture here at home. As the Fed views its dual mandate through the lens of full employment and stable prices, basically they've been sitting on the sidelines for years, waiting for inflation to reverse course, and I think they'll be waiting on the sidelines for quite a while longer.
We still maintain our forecast of 2016. The Fed continues to posture the idea of a 2015 lift-off, but that is very much predicated on the Fed's forecast for growth to improve markedly in the second half of the year, meeting their annual target, for the labor market to show further improvement, or, as of late, "some" further improvement, and, of course Open Market Committee members have to be reasonably confident that inflation is reversing course and heading back toward 2 percent. Certainly from an inflation argument they really have no additional data to suggest or justify an increased confidence in rising inflationary pressure. Thus, they have very little to hang their hats on, to suggest a near-term rate increase.
Q: But the markets seem to think 2015.
A: The market's been anticipating a rate increase since 2009. If you look back at some of the headlines the Wall Street Journal ran an article talking about the vast majority of economists anticipating a rate rise in September. Of course that was dated 2009. So the market continues to believe the idea that the Fed is ready to raise rates, and indeed they are, but the Fed is only ready to raise rates if the economy meets their forecast. That's the second part of the equation that the market seems to forget. The market forgot that second part of the equation in 2013 when we saw the "taper tantrum," when rates went up 100 basis points from March to September just at the mention of the word "taper." The Fed did not roll back asset purchases for several months after that taper tantrum.
Q: What's your opinion of earnings so far this earning season?
A: Earnings have been relatively disappointing. One of the concerning points from an overall economic standpoint is the big multinationals. You look at Caterpillar, 3M, and here is where you see very disappointing earnings, suggesting that the economy is not gaining momentum. This is where you'd expect to see a beat on the Street from those big multinationals. Certainly coming in under expectations is a big disappointment.
Q: Got an opinion on where the stock market is going?
A: The equity market certainly has room to continue its run-up if the Fed remains on the sidelines. However, if the Fed steps into policy-firming too soon, and you couple that with continued turmoil on the global stage that could spell a sizable correction for the equity market. That would all depend on the evolution of Fed policy. But certainly Fed policy would be a primary driver of a potential correction in the equity market.
Q: Do you see the dollar dropping any time soon, and if not, how much is it hampering corporate and Gross Domestic Product growth?
A: I don't see the dollar dropping much. The U.S. economy is still struggling to gain momentum, enough momentum to justify a rise in rates. But, on a relative basis, when you compare the U.S. fundamentals to our European counterparts, to the slowdown in China, we still appear to be on relatively firmer footing. That will continue to incite capital flows into the U.S. and continue to put upward pressure on the dollar.
The rapidly rising dollar is what we want in the long term, a strong, viable greenback. But in the short term as the U.S. economy struggles to gain legs, a rapidly rising dollar, up over 10 percent already just in the past year, makes U.S.-made goods relatively more expensive and less attractive to international buyers sending business and revenues overseas.
Q: How do you see manufacturing?
A: The strong U.S. dollar can certainly be pointed to as a primary scapegoat for why manufacturing has been so lackluster thus far in the U.S. economy and why exports have been undermined, as we see a continued downward trend in exports over the past six months.
Manufacturing is still in positive territory, but when we're bouncing around 51, 52 in the Institute for Supply Management index after reaching 60-ish levels just last year. Again it's that second derivative decline or a loss of momentum. It's still positive, but it should be significantly more positive when we're talking about an economy presumably nearing a near-term rate increase, or arguably gearing up for a rising-rate environment.
Q: What's your outlook on oil? Is the price going to go up?
A: No it isn't. Remember there's two sides to the story. You can argue it's a supply-side story with a global supply glut and certainly the U.S. becoming a major player in the energy production market, up over 70 percent in terms of production in the past several decades, a key player here contributing 9 million barrels a day.
So on the one hand it is a supply story, but on the other hand, it's very much a global demand story. Just as we talked about global demand going down and putting downward pressure on overall commodities, energy is experiencing that downward pressure just as much, continuing to keep oil at very low prices. That benefits the consumer, but on the other side of the equation, for producers, lower prices mean erosion of profit margins and eating into corporate balance sheets.
Q: Is the panic over the slowdown in China exaggerated?
A: I don't know if it's exaggerated, but it's something to keep your eyes on. You can't look at the U.S. economy in a vacuum. You have to look at it in terms of the global economy. What happens in China and what happens with the Chinese economy does affect us here in the U.S.
The Federal Reserve has been quite vocal about international events, noting that there is a concern about a risk of contagion -- that contagion being increased volatility in the equity markets, and declining demand putting further downward pressure on import prices and painting a more benign inflationary environment here at home. Also, global turmoil continuing to put upward pressure on the U.S. dollar. All of that global weakness translates back into a plethora of factors that we've talked about that could continue to undermine potential growth of the U.S. economy, not just in the second half of the year but as we roll into 2016 as well.
Q: What do you think about the eurozone and Greece?
A: The markets are quite calm at the moment, given the steps that they've taken to insure another round of emergency liquidity. But that does nothing to suggest that Greece will not come back to the funding trough for additional money, nor does it address the underlying structural issues of the economy. It doesn't address the fact that the Greek economy is struggling with a deep recession, that the economy is struggling with a 20 percent-plus unemployment rate, that the economy is struggling with a debt-to-GDP ratio near 200 percent.
None of these short-term "solutions" is actually a long-term solution, but rather just kicking the can down the road. Our opinion is that the endgame is the exact same one that it would have been back when the negotiations started in late 2010, 2011. That is for Greece to eventually leave the euro zone and eventually go back to their domestic currency.
For the Greek people it really doesn't matter, because either way it will be a decline in the standard of living.
But from a political standpoint when you have young Athenians protesting in the street and 61 percent of the population voting no against austerity measures it's much easier then to sell inflation than austerity.
In the end we will see Greece eventually exit the euro zone, as their current situation is unsustainable.
Q: Have you seen anything surprising ?
A: The market's reaction to the third bailout for Greece was quite surprising, that the market seemed to say that everything is fine now and turned its focus to other areas of the economy. That seemed a bit short-sighted. Certainly as Greece comes back into the news we'll see volatility and contagion fears spreading into the market. But at least for the near term, the market's not focused there.
The other issue I have with the market's reaction is to disappointing economic data. It seems as if the market is sloughing off the latest weakness in the latest reports and focusing on the Fed's continued rhetoric regarding some potential for a 2015 lift-off.
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