GDP Growth
Hakkio deciphered two basic trends among the respondents: One is that growth is currently weak but will strengthen through the year and, by the end of the year, be close to 3 percent. The other possibility is that growth is weak and it’s going to continue to get weaker and end up closer to 1 percent.
Jim Moffett argued for a third scenario: “the economy slows down until the mid-point of the year, and then by the end of the year we would be lucky to be back to where we are now.” He projected an average GDP growth of 2 percent.
“UMB,” added Bill Griener, “is assigning a 60 percent probability to the soft landing scenario, a 35 percent probability that the economy will be in a recession by the end of ’07, and a 5 percent probability that the economy reaccelerates with inflation.”
Tim Michel argued for 2.5 percent real GDP growth over the course of this year. “It’s a little Goldilocks,” he noted, “but we think that’s going to occur.”
Ernie Goss sees 1.2 percent GDP growth in the first quarter and 2 percent in the second quarter. “It’s much weaker than what we’ve seen in quite some time,” he said of the regional economy.
“I think that the economy for the next year may remain sluggish throughout the whole year,” said Mike Stellern. “I am not sure that we’re going to see the rebound in the second half of the year that people are talking about.”
“We’re looking at a slightly lower position at this point next year than we are right now,” agreed Jeff Pinkerton. “We might be sitting around this table a year from now talking about a more optimistic 2008. I think this is going to be a sluggish year but also a year of correction.”
Dave Anderson projected 2 to 2.25 percent GDP growth for the year. “I really think it’s going to be kind of slow. Just slow the entire year,” he observed. “I don’t tend to be too optimistic.”
“I am a little more optimistic than some of my colleagues here,” said Chuck Krider. He projected GDP growth of about 2.5 to 3.0 percent over the year. “I think the strong employment growth is real and is not going to be revised away,” he noted. He added too that monetary growth has been very strong, around 7 percent in recent months. “I would be really surprised if the economy goes into recession with that kind of monetary growth.”
Randy Moore argued for 2.5 percent growth year to year but 2.75 from fourth quarter to fourth quarter. “So we are actually accelerating trend over the course of the year.”
The Dollar
Bill Greiner contended that economic slowdowns occur because there are excesses that need to be corrected in the economy to one degree or another. One of the excesses that UMB has highlighted Greiner refers to as a “liquidity excess or an excess of confidence.” He sees an unending supply of capital to the markets. “That I think might eventually lead to real concerns to the value of the dollar,” said Greiner.
“I am curious,” Randy Moore asked, “why you single out the dollar as being at a great risk because of this willingness of investors to take on more and more risk? It’s really a global phenomenon.”
As Greiner explained, his concern was the growing indebtedness position of the United States.
“The dollar has started to decline,” affirmed Chuck Krider. “That’s likely be-cause our trade deficit is so huge.”
Michael Stellern questioned whether the trade deficit was relatively or absolutely large. “Money is flowing out and money is flowing back in,” said Stellern. “As long as the money is flowing back in, it’s like the deficit is no problem. It’s just a question of how long that money is going to continue.”
One of the risks that everyone identified, Craig Hakkio observed, has to do with the constriction of free and open trade. “Right now,” he said, “the US is a great place to invest—free and open markets, relatively strong productivity.
If not the US, where are you going to invest? China? Latin America? Africa? Russia? Europe?” He argued as long as the US remains an attractive place to invest, the money is going to continue to flow in. “It’s only if we do something dumb, like raising protectionist tariffs or preventing foreigners from purchasing US securities and US companies. That’s where I would see the risk coming from.” Tim Michel identified a particular risk in protectionist legislation against China.
“I see the dollar having a slow decline,” said Krider. “at least the first part of the year. It’s been declining; it will continue to slowly decline. That is going to raise import prices.”
“I am not totally convinced that the dollar is going to depreciate,” attested Dave Anderson. “I think it will appreciate about 10% for the year against the Euro, and will depreciate against the Yen.”
“The dollar has been depreciating since ’71 when we went off the gold standard,” added Moore. “I don’t think that’s going to change in the next 20 years.”
(...continued)