The hottest ticket in town? The Annual Economic Outlook Conference. Truth.
Steve Slifer gives us swagger. Sure, you might lose a little if you make that statement working a decent lisp, but it’s already kind of nerd swagger, anyway.
We walk into that ballroom of the Daniel Island Club every first Tuesday in December with enough knowledge of the nation’s economy to make us dangerous in a conversation with our great-aunt Berta, whose idea of a diversified portfolio means burying her mason jars of cash under various shrubs in her backyard. Then Slifer steps up to the podium – like a boss – and 45 minutes later we are ready to take on Alan Greenspan in a Fed policy rap battle.
Now, one week after the 2016 Economic Outlook Conference, we have Slifer to thank for a posse of 250 loose in Charleston, packin’ intel on the country’s financial future. So it’s a good thing our head homey has some serious street cred to back up the swag we steal from his sold-out show.
As the Chief U.S. Economist for Lehman Brothers from 1980 until his retirement in 2003, Slifer was responsible for the firm’s national economic forecasts. He’d spent the decade prior to that as a senior economist at the Board of Governors of the Federal Reserve in Washington, D.C. The Daniel Island resident is a two-time author and columnist for the Charleston Regional Business Journal, current owner and chief economist at NumberNomics, LLC, and was named top economist by Institutional Investor magazine five consecutive years.
Don’t be fooled by his trademark upbeat, friendly demeanor. He may be delivering a generally optimistic forecast, but he is a thug realist (or rillist, as the kids say), running numbers, behaviors, and trends like they’re wearing new sneaks. And year after year, Slifer proves a reliable prophet with his Outlook. This year’s predictive title even had a hip hop ring to it: “Rolling, rolling, rolling.” (Okay, rollin’ reads more gangster, but so does being the biggest smarty-pants in the room.)
Reminding us what comprises the GDP pie, Slifer names Consumption as the lion’s share (64%), followed by Government (16%), Trade (10%), and Investment (10%). He then speaks to each expenditure’s impact, both current and future, on the economy.
“We always start with the consumer; you and I are the biggest chunk.”
Consumer confidence is as high as it was pre-recession, currently hovering around 90%. Net worth continues an upward trend, driven by the relatively consistent climb of the stock market over the last six years, as well as a steady 5% increase in home prices. In addition, debt to income is at the lowest level it’s been since the 1980s, which allows for an uptick in consumer spending. Borrowing remains inexpensive, with banks being “less stingy.” About 200,000 jobs a month are becoming available, and the cost to fill a tank of gas is just half of what it was last year. Existing home sales are creeping toward pre-recession levels, and demand outpaces supply as new “household formations” rise with the exodus of newly-employed graduates from under the roof of mom and dad. The only potential hit to consumer confidence could have been concerns about slow growth in China impacting the U.S., but all signs point to a rebound in that market. Our nation’s personal consumption spending is healthy, and expected to remain so into the next year.
“The investment wedge was chugging along at about an 8% rate roughly this time last year, and then the bottom fell out.”
Investment spending dried up because of the big drop in oil prices. Crude oil spot prices have fallen from $107 per barrel in October 2014 to approximately $42 today; 60% of the rigs that were in operation a year ago are shuttered today. Slifer states that this trend is largely a function of technology, which has actually allowed for a 60% increase in oil production per rig in the last year alone. Oil inventories are at a record-high level, and the Energy Information Administration says prices will rise only to around $51 per barrel in 2016. If the EIA’s estimate is correct or even a bit overstated, this would indicate a tapering off of the drag decreasing oil prices have had on GDP growth.
“Trade’s 10% portion is not a big piece of the pie, but interesting stuff happening there.”
The widening trade deficit has acted as a brake on GDP growth over the last year, and Slifer expects this trend to continue into 2016. The first reason is the midyear slowdown in China’s economy, but signs point to a recovery in that country’s GDP that would bring the resultant drag on the U.S. economy to a halt. Second, the trade-weighted value of the dollar has risen 15% in the last year, due to investors seeking the safety of dollar dominated-investments. As “global nervousness” lingers, the dollar will continue to strengthen, meaning U.S. goods will become more expensive for foreigners to buy and foreign goods will become cheaper for Americans to buy. So the trade deficit, as considered by Slifer, will continue to both increase and drag down GDP growth - perhaps by three-tenths of a percent - in 2016.
“Government spending is real easy.”
As the wars in Iraq and Afghanistan were winding down, government spending followed the same trajectory. Now that it is flat-lined, government expenditures should not have much impact on GDP growth. Now comes the fun part: adding up all the pieces (yes, just like nerd swagger, there is nerd fun). Slifer’s math signals a 2.6% growth in GDP for 2016. But there is a faction of people (we didn’t say haters) who believe that the economy should continue to grow at a 3.5% rate. To them, our resident economist shoots straight: the days of that kind of growth are behind us. But he also gives us some pretty fly arithmetic to back up that statement:
Economic speed limit = growth in labor force + productivity
In the 1990s, growth in labor force was around 1.5% and productivity neared 2%, for an economic speed limit of 3.5%. In 2015, growth in the labor force was closer to 0.5% (due to retirement of baby boomers and unremarkable supply of skilled workers) and productivity hovered at 1.5% (resulting from relatively sluggish output in most sectors), which adds up to an economic speed limit of just 2%. So, actually, Slifer is being somewhat generous with his foretelling of 2.6% growth. But he also suggests that we not worry too much about slower progress in productivity, as technology gains will keep the economy rolling, rolling, rolling. And he offers some advice to the government, as well: get out of the way and let the private sector do its job, yo. It’s doing just fine. Finally, Slifer takes on Fed policy, remarking that of all the elements that could impact the economy, the Fed is the easiest; they’ve already indicated their plan to raise rates and proceed very slowly. And as the funds rate creeps back to an estimated neutral rate in 2018, there is some safety in knowing that the U.S. economy has never been in a recession until the funds rate has been above neutral. This would mean little likelihood of a recession before 2019 (this is not a prediction for a recession in 2019). The Federal Reserve is at the wheel of the largest expansion on record. Slifer’s word? We’ve got 99 problems, but the Fed ain’t one. Drop the mic.
Slifer’s swagger to-go:
GDP growth moderate – 2.6% - in 2016, but uneven.
Consumers/housing great. Manufacturing/trade weak.
Labor market – at full employment.
Inflation poised to rise.
Rates to rise by December, then increase slowly.
No recession until 2019 at the earliest.
GDP: 2015 – 2.3%, 2016 – 2.6%
Unemployment Rate: 2015 – 4.9%, 2016 – 4.5%
Inflation Rate: 2015 - 2.3%, 2016 – 2.8%
Fed Funds Rate: 2015 – 0.3%, 2016 – 1.5%
10-year Note: 2015 – 2.2%, 2016 – 2.8%
30-year Mortgage: 2015 – 4.1%, 2016 – 4.5%
Sponsors of the 2016 Economic Outlook Conference
“The one thing they have in common is a belief in the power of information.”
Charleston Digital Corridor Charleston Regional Business Journal
Daniel Island Business Association
Daniel Island Property Owners Association
NumberNomics
Robert W. Baird
Trident Technical College
Wells Fargo Advisors, LLC