As Chuck Krider observed, businesses other than manufacturing are still hiring new employees. “The economy,” he observed, “might be a little bit stronger than any of us economists think it might be.”
Michael Stellern agreed that the employment figures are very good, below 5 percent in fact. “Baby-boomers are getting to the age where they are starting to retire,” he noted, “so I think there is going to be a real shortage of skilled labor. You are starting to see the first signs of that.”
One potential result of strong employment numbers, Krider commented, is that the Fed will be less likely to cut interest rates. Bill Greiner added that historically, if unemployment rises by 1/6 from its trough, whatever that number is, then the Fed has always started to reduce interest rates. “What has to happen,” he noted, “is unemployment has to rise to 4.8% before that occurs.”
Housing
“I don’t think that the housing starts have bottomed out completely yet,” said Dave Anderson. He added that there are still a lot of unsold houses and inventory levels are still very high. Ernie Goss agreed that we’ve not seen all the negatives yet in this market. “There are builders still out there building,” he observed. “They’re build-ing because bankers will lend the money.”
“I don’t know if that market has bottomed out yet,” affirmed Michael Stellern, who noted that housing starts
are at their lowest level since 2000
and that “the housing market has really slowed down the American economy.”
“The fundamentals for housing are still pretty good,” countered Chuck Krider. “Interest rates are moderate. They’re not really high for housing.”
Bill Greiner contended that “the housing market really is two different markets.” What adds to GDP or detracts from GDP are housing starts and the new housing market. According to Greiner, this market is dominated by business people, who start contracting inventory and bringing prices down when the market flattens. He argued that this is already happening.
The secondary market, as he sees it, directly impacts consumer discretionary expenditure. This takes up to two years prior to a decline in pricing to actually weave its way through the economy. “We have not yet seen the impact of falling prices from the consumer. But I think we probably will,” he noted. A rising equity market has, however, been muting the impact of a flattening housing market.
Jeff Pinkerton contemplated the plight of those homeowners who bought their dream home prematurely with interest-only loans. “That’s why I mention delinquency, default, and foreclosure financed by derivatives,” said Dave Anderson. “That’s the issue in my opinion in ’07.”
Productivity
“We have had a period of very high productivity growth,” Craig Hakkio noted. He asked his colleagues whether that productivity optimism, prevalent since the mid-1990s, was going to continue.
Bill Greiner asserted that there is a direct, positive link between capital spending and productivity. “With that in mind,” he noted, “during the latter portion of this year, you may see productivity gains becoming a little more winded, slowing down a little bit.”
“I’ve been shocked that productivity has been at the levels it has been,” said Tim Michel. “I think it is going to be somewhat weaker,” said Ernie Goss, “but still fairly strong.” As Goss noted, there has been a corollary weakening in capital spending.
“I think productivity can sustain a cut-back in capital spending because the employee is different now,” said Jeff Pinkerton. As he noted, the employee has assumed the onus of retooling and staying market ready.
“I see productivity coming in a range of 1.5 to 2.0 percent,” said the more optimistic Chuck Krider of the University of Kansas. “This,” he added, “would be an excellent record for this stage of the business cycle.” Randy Moore predicted the same range. He believes, however, that the continuing rise in labor will have a restraining effect on productivity.
(...continued)