The first question Hakkio put to his colleagues was whether the lack of growth or the quickening of inflation posed the greater risk to economic stability.
Jim Moffett, lead manager of UMB Scout International Fund, sees “a bit of a slowdown,” which he believes is probably more important than inflation as a threat. “We are the consumer of first resort so to speak,” says Moffett. “The rest of the world will respond to that slowing. The Chinese are trying to slow down their economy too.“
Tim Michel, director of investments for Bank of America, agreed that the biggest risk is on the growth side. “The hope is that folks are done with the rate increases,” he said of the “folks” at the Federal Reserve. He believes that further rate increases have the real potential to strangle economic growth.
At Creighton University in Omaha, professor of economics Ernie Goss does regular surveys of bankers and purchasing managers throughout the Midwest. What he has gleaned is a “pretty consistent slow down,” more so among the purchasing managers than among the bank CEOs. He sees more likely negative potential in slowing growth than in rising inflation.
“I think I am more concerned about growth than I am about inflation,” said Mike Stellern, professor of economics at Rockhurst University. “The warm winter,” he noted, “has helped retard inflation on the energy front.”
“I think inflation is still somewhat of a risk,” agreed Jeff Pinkerton, senior researcher from Mid America Regional Council, “but not as much a risk as slowed growth.” Pinkerton expressed particular concern about the slowdown in the housing market.
Dave Anderson, senior vice president of Financial Counselors, also believes that the primary risk is on the growth side. Said Anderson, “I think if we all said a year ago, ‘Fed’s going to raise 17 times and it won’t cause a recession,’ we would be shocked.” Anderson expects some shocks to the economy this year, but he is not sure where. “I am not as worried about inflation,” he added, “as long as we have global free trade.”
“I am concerned about the GDP growth as well,” said Chuck Krider, professor of economics and director of international business at the University of Kansas. Krider is optimistic about inflation. He believes that commodity prices have flattened out recently and there is little likelihood that they will exceed the peaks of last year. “I am optimistic on the economy having good growth,” he added, “but slow enough so that the Fed does not get too excited and overreact and keep raising rates back in that 6 percent range.”
Randy Moore, editor of Blue Chip Economic Indicators, expressed relative optimism about the year ahead. “It is clear that we have had a significant slowdown in the economy and the rate of growth,” he said, “but it has been very concentrated in the goods-producing sector of the economy.” He noted too that the Con-sumer Price Index (CPI) is going to con- tract at an annualized rate in the 4th quarter. “That has happened 8 times since 1955. Three of those times have been since 2002. The fact that inflation slowed so much,” he added, “is one of the reasons that real GDP growth, will look halfway decent in the 4th quarter.”
“We as a firm believe that growth is probably more of a risk to the economy at this stage than an inflationary up-tick,” said Bill Greiner of UMB where he serves as chief investment officer. He argued that the consumer residential real estate market is probably going to be a drag on the economy, particularly on consumer discretionary expenditure, throughout the year.
“I may not be that different from many of you,” added Craig Hakkio.
“I think that the most likely outcome is for growth to be weakened in the first half of the year. Residential investment is weak, but it will be less weak as we move through the year.” By the end of the year, Hakkio expects to see growth “returning to trend.” He is concerned, however, that inflation will not decline as much as expected. “I see that as the bigger risk,” he noted.
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