Cautious Optimism at the FWA’s Economic Forum II: The American Worker

By Melissa J. Anderson (New York City)

Last night the Financial Women’s Association of New York held the second of its Economic Panel series: The American Worker. Moderated by Patti Domm, Executive News Editor of CNBC, Panelists included Richard B. Hoey, Chief Economist at BNY Mellon and The Dreyfus Corporation, Joseph A. LaVorgna, Managing Director and Chief US Economist, Deutsche Bank Securities, Inc., and Edward F. Keon, Managing Director and Portfolio Manager, Quantitative Management Associates (QMA).

The discussion focused on the state of the economy and unemployment as the Untied States exits the recent recession. LaVorgna started the evening asking for a show of hands – how many in the audience were worried about a “double dip” recession, as defined by the economy “rolling back” within a twelve month period following a recession. More than half the audience raised their hands.

LaVorgna had some positive information though – only three times, he said, since 1884 has a double dip occurred – the most recent in the 1980-81 cycle. In fact, all three panelists expressed doubt that the recession would see a double dip. Hoey said, for example, that the 1980 recession is inherently different than the recent economic downturn. He explained that the reason for the 1980-81 double dip was anti-inflationary policy by then-Fed chief Paul Volcker – an intentional double dip.

“There is no proclivity for this policy driven recession today,” he explained, as Ben Bernanke, in contrast, is pursuing anti-deflationary policy. Furthermore, because we are seeing “the large corporations with strong balance sheets today, both financial and non-financial,” and that these companies are “very liquid,” with rising profits and cash flow, makes “the odds of a double dip… quite low.”

“We’re more likely to see 6-5% growth than a double dip,” said Keon. “I do think at the end of the day we’re to see a strong recovery” he said. “To really push us into a new recession we’d need something like a shock or serious policy mistake, which I think is unlikely.”

The Job Outlook

Hoey reported good news and bad news on the economy. The good news is that he sees a sustained economic expansion. The bad news? “8.5 million people have lost their jobs and the speed of growth is not going to be as fast as it normally is in a postwar recession.” He explained that the slow speed of growth is related to the negative rate of growth of the housing market.

Keon believes the first step in job growth would be increasing the hours of current workers, then referring to recent data showing temporary job growth up, “maybe we’re in stage two” – the hiring of temporary workers.

LaVorgna commented on the temp job data, “my guess is it’s [related to] uncertainty about the future,” rather than a permanent, structural move toward temp hiring.

Changes in Regulation

“My sense is that very little will get through this year,” LaVorgna commented about the prospect of further regulatory changes – particularly the Volcker rule or a proposed 5% tax on banks.

Keon agreed, “It will difficult to get anything passed. They’re worried about competition going abroad – for example to Switzerland.”

Furthermore, “we’ve already seen many changes at the institutional level. New regulations would be simply codifying them. We may see something called reform to build credibility with voters, but in substance it wouldn’t be dramatic,” he explained.

Still Sorting Out the Housing Mess

“The severity of the hangover the morning after is a function of the wildness of the party the night before,” Hoey joked.

He believes that the housing bubble was caused by a bipartisan decision to push US homeownership rates form 64% to 70% – a policy decision which enabled people who couldn’t afford houses to buy them. “We have now come to a point where housing prices have normalized,” he said.

He does not expect prices to return to where they were at the peak of the bubble.

What are Prospects for Rising Real Wages?

“They’re pretty poor,” said Keon with a laugh. “In the short term they’re not going to get any better.”

Five years from now, though, Keon predicts a labor shortage as the baby boomers retire, which will result in, “a real sharp increase in real wages in the middle of the decade.”

“The complication to that is that baby boomers aren’t that productive!” Hoey joked. He then cited global competition from lower-wage areas which are holding back wage inflation, as well as a decrease in unionization.

In sum, the panelists showed a cautiously optimistic outlook moving forward – agreeing a double dip recession is unlikely and anticipating steady growth, while also anticipating slow job growth ahead.