MIAMI — The strong profits companies have been pocketing for the past couple of years may not be enough to have made CFOs overly enthusiastic about the economy’s mid-term outlook, but the picture is brighter than many think, according to a leading economist.
There clearly is much uncertainty ahead, allowed Gregory Miller, chief economist for SunTrust Banks, in a keynote address at the CFO Playbook for Private Companies conference on Monday. Still, “My outlook right now is generally positive,” Miller said. Despite widespread fear that a recession may be around the corner, he noted, “If you get down into the guts of what’s going on and the economic data, none of it is screaming [about] a slide into another recession.” The current economic expansion, now four years old, should last at least another two years, he opined.
Uncertainty is difficult to quantify, Miller pointed out. But, he said, “My most certain piece of advice for you is, listen to the press and enjoy the stories they tell, but depend on the data. Don’t get distracted by high-profile, low-impact events. Don’t get distracted by talking heads telling you the economy is on the verge of slipping over the edge of a cliff into an abyss.”
Two examples of high-profile, low-impact events were the federal debt-ceiling battle in Congress and the government shutdown in the first two weeks of October, according to Miller.
While much political hay was made about the economic impact of the shutdown, the actual impact was “almost imperceptible,” he said. “By the end of October it will all be washed out, like it never happened.”
The “big question,” Miller said, is whether there should continue to be a cap on government debt. For his part, he advocated its abolition. He noted that since the Carter administration, the United States has approached its debt ceiling 49 times and Congress voted to raise it 49 times. In fact, he said, that has been the case every time the ceiling has been approached since it was established in 1914.
“In the aftermath” of a hike in the debt ceiling, he said, “the momentum of federal spending does not change. All it does is provide a headline for the political side of the economy. And who owns the federal debt anyway? Seventy percent of it belongs to U.S. individuals, investors, corporations and federal agencies.”
Except for Europe, the worldwide economy is strong, particularly in the United States, Miller said. “For those of you who are still inundated by your international partners telling you the country is on the verge of falling to second-class status, the truth is that the United States is as dominant across the globe as it has ever been, and there aren’t any strong signs that we’ll head in the other direction. One of every three dollars in global wealth is here. Our economy is greater than the combination of our five nearest competitors.”
Miller said the private sector of the U.S. economy is performing at a level that should create strong, 3.7 percent annual growth – were it not for the government, which he said is creating a 1.7 percent drag, leaving the economy growing by only 2.0 percent. “We need improved government policy,” he said. “When you commit economic decisions to political solutions, you practically guarantee a second-best outcome. And yes, I’m talking about health care too.”
Still, he conceded that some of the positive private-sector performance is illusory. Despite the booming stock market, “below the surface it doesn’t look as pretty. Profits these days are generated by your ability to cut costs. Revenue is still weak by virtually any metric, and you can’t cut your way to prosperity.”
On the other hand, signs that the Federal Reserve is preparing to finally loosen its clamp-down on interest rates suggest an economic surge may be near. “It’s worth noting that rising interest rates are not the same as high interest rates,” Miller said. “Starting from the bottom and rising up, rising rates are a very strong economic positive. Bank lenders and borrowers start making friendly again.”
He predicted that the Fed will close down quantitative easing by the middle of 2014 and allow interest rates to rise. Mortgage rates have already risen from below 3.5 percent to just above 4.5 percent. “That’s still below the first standard deviation in what are considered low interest rates in this country,” he said. “Fed-neutral” — the point at which any further rate increases begin to harm the economy, which in mortgage-rate terms is somewhere around 8 percent — is a long way off, Miller stated.
The biggest economic risk the United States faces, he said, is that while 68 percent of the economy rests on consumer spending, consumers’ monetary resources are stagnant. “There is no wage growth in real terms,” he said. “I’m talking about real, disposable, after-inflation, after-taxes income. The long-term average for that fundamental measure of cash flow for the household sector is 3.2 percent annual growth, right about along with the overall economy. But for the past four and a half years, it’s been growing 0.2 percent. If you’re going to keep people spending, they’ve got to have continued resources.”
During the recession and the recovery since, returns on business productivity have been distributed in “a biased fashion,” Miller said — in fact, “107 percent of all the returns have gone to capital. That’s one of the reasons profitability has been so strong. But it means stagnant wages, and the labor market can’t fix that. New jobs add a small increment to the number of wage earners, but the issue is what happens next year, when even the new job-holders from this year have no growth in their resource base.”
Miller also took corporate America to task for practically ceasing its hiring of new college graduates. In the “old days,” he said, when a company began a hiring program it would take on perhaps one new senior manager, fill a few middle-management positions, “and [look] downstream for college students.” A graduate’s grade-point average got her or him a job. No longer.
“We’ve substituted experience for education,” he said. “Now employers are hiring rainmakers. They don’t want to do succession; when an opening occurs they want to hire from competitors. That means they simultaneously have low wages and high incremental labor costs. The implication is pretty clear: businesses don’t want to bear the costs of training new hires. That’s extremely nettlesome, but I don’t have a real good answer to it in my pocket.”