After peering into a financial and economic chasm, the U.S. is beginning a slow climb back out of its predicament, Effingham Chamber of Commerce members learned Wednesday morning.
Jay O’Connor, senior vice president of Alliance Bernstein Investments, said Coastal Georgia’s recovery from the recession also should be faster than the rest of the state’s.
“It doesn’t feel as if it’s getting any better,” he said at the membership breakfast at New Ebenezer Retreat Center. “But it is. We have seen the abyss. We stared into it. We got awfully close to collapse. But we came out on the other side. We are returning to normal, but we are not there yet. Port-related cities in the Southeast are recovering much, much faster.”
Before the national and global economy began to cartwheel off the tracks in late 2008, the Dow Jones Industrial Average was over 14,000. A year and a half ago, the stock market’s leading indicator was at 6,600, O’Connor noted.
It’s now back over 11,000 — and the federal government’s firm hand in the financial markets over the last year and a half has pushed the result, according to O’Connor. He said current chairman of the Federal Reserve System Ben Bernanke, former Treasury Secretary Henry Paulson and current Secretary of the Treasury Timothy Geithner aren’t getting enough credit for their efforts in staving off an economic implosion.
“The market has responded to tremendous governmental intervention,” he said. “The only thing that could have been worse was to do nothing. They were operating with no precedent, with no roadmap. We weren’t months away from total fiscal and financial collapse. We weren’t weeks away. We were hours away.”
O’Connor and his team believe the global economy will grow at a rate of 3.8 percent and the U.S. economy is on the verge of bouncing back strong.
“We’re very bullish on the U.S. than on the rest of the world,” he said. “We think it’s going to be a much swifter recovery than what most Wall Street firms think.”
Other numbers also are expected to rise, also at a moderate pace — interest rates and inflation. So too will consumer and business confidence indices. Confidence, while still weak, is growing.
By next year, business and consumer spending will start to re-accelerate, according to O’Connor. Prior to the recession, the savings rate had fallen to –1.5 percent, but it is back up to over 7 percent.
Home lending is up by 8 percent, and banks are more willing to lend money now, O’Connor said.
“And that is the essence of this recovery,” he added. “We’ve had 30 years of declining interest rates. Hopefully, we’ll never go back to the willingness to lend levels that precipitated this collapse.”
The American Recovery and Reinvestment Act, with a price tag of $787 billion, has made an impact and its biggest effect may yet be coming, O’Connor said.
“It is so much money, and the vast majority has yet to be spent,” he said. “Only 40 percent of that money has been spent. That number makes up 2 percent of the global economy.”
Inflation will be influenced by supply vs. demand, wage growth and money and credit growth. Consumer spending remains weak as people have stopped buying, “not even the things they need,” O’Connor said.
But that pent-up demand is like a spring, he said, and when it releases, it will lead to a sharp economic recovery.
Even as oil prices shot up dramatically, inflation didn’t because wages didn’t grow with those oil prices, he said. The downturn also resulted in something heretofore unseen — the amount of new vehicles bought every year had always outpaced the number of old vehicles taken off the road, until the span of June 2008-June 2009. Gas prices, O’Connor said, seemed to have little effect on that, as that trend continued even as fuel prices eased.
Inflation likely will end this year at around 2.1 percent, he said, but interest rates will grow higher. The federal fund rate is at 1.75 percent, extremely low by historical standards, O’Connor pointed out, but higher than it has been in recent years. Interest rates could climb to 2 percent from a low of 0.3 percent at the beginning of the year.
“There is no doubt inflation is coming,” he said.
Rising interest rates usually don’t have an effect for about six to nine months, but the government and the financial sector now have tools in place to keep economic trouble at bay for the next 12-18 months, O’Connor said.
The projected federal budget deficits also won’t hurt the economy as much as thought, he said.
“The budget deficit, which is ballooning at a record rate, will not be as bad as we think,” O’Connor said.
While Americans aren’t spending like they used to, a growing middle class across the globe is expected to take up some of that slack. Overseas companies also are investing more in the U.S., one of the advantages of a weakened dollar, and that will spur job growth, O’Connor said.
In fact, the recovery could be well in hand before jobless numbers decline significantly, he said.
“Unemployment is always the ultimate lagging indicator,” he said.
O’Connor also believes that innovation won’t be choked off by anticipated regulations. The next growth market, he said, could be human genome production and clean-burning coal technology.
The human genome advances could lead to personalized medicines and may even allow doctors to tell, at birth, to which diseases a person may be the most vulnerable.