2:00 P.M. EST
THE NEW YORK FOREIGN PRESS CENTER, 799 UNITED NATIONS PLAZA, 10TH FLOOR
MODERATOR: Thank you everyone, for coming today. It’s our pleasure to have with us a team of economists from the Conference Board. We have Bart van Ark, the chief economist; Kathy Bostjancic, the director for macroeconomic analysis; and Lynn Franco, director for economic indicators. I sent you all their bios in advance, so I think we can just get right to the presentation. Thank you very much.
MR. VAN ARK: Thank you so much for hosting us again. This is an annual event that we now do with the Foreign Press Center on the global economic outlook of the Conference Board. What I will do is I will speak for about 10 minutes about the global outlook -- sort of give you the headlines -- and then I’m going to rely heavily on my colleagues, Kathy and Lynn, to speak about specific things you will be interested in. I’m sure there will be many questions about the U.S., which, of course, we’re happy to answer. Lynn is working on the consumer confidence. Kathy is working on our outlook for the U.S. But also, if you have any other questions on Europe, on China, I’ll say a few words about that in my introduction, and of course, we’re very happy to deal with that.
This outlook we do annually, and you have a little document that gives the headlines of this. It’s basically a three-stage outlook. It’s an outlook for 2013, so for next year, then a medium-term outlook to 2019, and then a long-term outlook to 2025. So the further you go out, the more interesting and exciting it gets, of course. But the number of uncertainties that we even have going into next year are quite substantial.
What we are seeing for next year is a slowdown that’s going to continue. We had a fairly big slowdown this year. We grew at about 3.9 percent in 2011. We’re going 3.2 percent according to our estimates for this year, and will slow down a little more to 3 percent in 2013 – 3 percent globally, that is. And really, that slowdown is coming from pretty much everywhere in the world. Unfortunately, there are not many places at the moment of significant size that are actually showing an improvement in economic growth, and that is, of course, a major concern not only for the individual countries, but also for global business, for which we do a lot of work. There are really very few places where you actually can see upside potential at the moment.
Clearly, what happened in the last year is that the slow growth in the mature economies – so U.S. and Europe and Japan – has been joined by slower growth in the emerging markets, and some of that slower growth in emerging markets was desirable because, notably, China and also India were in an inflationary-type of environment in 2011, so they needed to slow their economy a little. But then, of course, in 2012, they began to suffer from the greater slowdown in the mature economies, which were impacting their exports, particularly in the case of China. And that has actually pushed their growth even slower than was originally the case.
So it’s that new phenomenon now that we’ve seen in 2012 that will, in our view, continue in 2013, that emerging markets, together with mature economies, are slowing. Of course, their growth rate is still much higher than it is in the mature markets, but surely, it is not a place where you can generate an acceleration in growth.
Now, the U.S. – I will be very brief about that. Kathy and Lynn will talk a little bit more about it. But of course, there is huge uncertainty. We expect that the cliff, the fiscal cliff, will happen partially, but partially, we will also begin to deal with some of the problems. And our guess is at the moment – I’ll let Kathy talk a little bit more about it later – that the payroll tax cuts are going to be expired as well as the unemployment duration benefits. And that is taking away roughly about one-third of the fiscal cliff that will actually happen. For the two-thirds, we are probably going to look at some kind of bargain that’s going to happen very likely later. It seems unlikely that a grand bargain is – can be happening within the remaining 30 days of this year, but you never know. I mean, we are not politicians, so we cannot predict this.
But we think a partial cliff is going to happen, but even a partial cliff is going to slow the economy in the beginning of next year, because consumers will see that very quickly into their payrolls. Particularly the payroll tax cuts is going to affect the large middle class, middle income, category substantially, and that is going to slow the economy.
However, underlying, we do see some strengths in the U.S. economy, notably in the housing market, to some extent also in the labor market, even though it is a slow process, but we feel that that process, also looking at our consumer confidence numbers, is likely to go to proceed into next year. The question is when that underlying strength of the economy will be fast enough to offset the short-term uncertainties, and we expect that probably to happen sometime in the middle of next year, in 2013, that we actually may begin to see growth accelerating. However, growth in the U.S. will remain below 3 percent, more in the range of perhaps 2.5 percent in the second half of the year versus less than 2 percent in the beginning of the year.
When it comes to Europe, what we’re really facing now is that we actually have made significant progress in creating more financial stability in Europe. The announced anticipated actions of the European Central Bank have already stabilized the financial markets very substantially. However, what we are not seeing is the other part of the crisis that needs to be resolved, which is basically the political crisis. For the European Central Bank to act, we will need to have a banking union; we will need to have a well-organized process for countries to access the ESM stability mechanism in case they need additional funding to stabilize their economies. And all that is very uncertain. Together with, for example, the uncertainties that we have seen in the past week around the European budgets are all signals of the fact that the policy environment in Europe is still very unstable. So we don’t see the financial stability going to be translated into an improvement in their economic growth performance. If anything, we are hopeful that perhaps we can just move into positive territory with the Euro area again in terms of growth next year, but it won’t be very much, and the downside risks are probably higher than the upside potential.
I already made a comment on the emerging markets, and indeed, we are somewhat less optimistic than some other organizations that do projections – for example, the IMF, which has projected that, for example, China’s economy will begin to improve again next year. We think that that acceleration is going to be very, very little and perhaps even not significant in the sense that the Chinese economy may actually continue to slow down further.
But what is a much bigger issue in China is the underlying risk in the economy, particularly, again, in the financial sector. We see a lot of weakness in the financial system; a very large, gray financial market, so informal financial markets. That is really a recipe for a lot of instability and potential for shocks. So we do not hear our members in China being very confident about the fact that the Chinese economy can actually begin to accelerate into the next year. It’s probably going to gradually slow with, again, a more downside risk than upside potential.
So overall, we are going to look at the global economy that is gradually slowing into 3 percent next year, but then in going forward, we think that that slowdown will actually be going to continue at a very gradual pace, which I’ll come back to in a minute.
Here are some of our leading economic indicators, which really give us the short-term outlook. These indicators give us an idea of whether we’re going to see turning points in the economy in the next six months or so, and you can see the U.S., the red line; the Euro area, the blue line; Japan, the green line; and the UK, the orange line. They’re all just above zero or below zero. Below zero basically means that we’re going to look at a contraction of the economy and that is, of course, already happening in the Euro area and in the UK. And also in Japan, we are extremely concerned about a recessionary risk right now.
U.S. is just above zero, again sort of reflecting some of the underlying strength that the economy is beginning to build up, but again, because of all the uncertainty out there, we do not see that index accelerating strongly. China is at a higher level, but we should realize that China, of course, is still a rapidly growing economy, and a lot of that upward potential in China is actually driven by bank loans. And I already made my comment about the financial instability that China is looking at, so increased bank loans are not necessarily a sign of positive growth projections in going forward.
So here is our outlook for 2013. 2012 are the blue bars; 2013 are the red bars. And as I said, there is really very little scope for acceleration across the globe. We just see around sort of 1 – just over 1 percent, 1 to 1.5 percent in the advanced economies. The U.S., of course, faster than Europe, some of the other advanced economies, including Korea and Taiwan, faster. But this is about what the advanced economies can do in this time span.
But in both China, India, other developing Asia – although there are some upsides in the case of Indonesia, for example, but overall, still slowing. Latin America, including Brazil, still slowing in our view. We think that the outlook for Brazil – of Brazil returning to a 4 percent growth in next year is somewhat too optimistic, although it may look better than it actually does this year.
And then, of course, a lot of uncertainty in the Middle East partly related to oil prices. Low oil prices is not good for growth in the Middle East. And then, of course, there’s a lot of uncertainty among the sort of political developments in the Middle East, which are going to have a negative impact on the economic growth performance. So you see the 3 percent decline happening.
It’s actually interesting when you look at this you see all these slowdowns in individual regions that actually the slowdown for the world is limited. It’s only up by two percentage points. And that is, of course, simply because the fact that these emerging markets are still growing faster, and therefore getting a bigger share in the pie. And that sort of mathematically gives us a better outcome for the global economy than it does for each of the individual regions. So – but still it’s overall a slowdown.
When we look at the longer term, it’s very important that we think – and we spend a lot of time on that at the Conference Board – to think about what is really explaining that slowdown, because most of what we hear in the media is basically, well, this is a soft patch. There’s just low demands in the global economy, and that is surely true, certainly for the mature economies. For example, in the case of the United States, we are still looking at what we call an output gap, which means that we are still producing as an economy about $900 billion less than we could if our unemployment rate would be much lower and if we would make all our investments and reinvest in the economy. We’re not doing that, and as a result, that gap between what we actually produce and what we can produce has been very large, and it is only closing very slowly. So indeed, if demand comes up, it will help us to close that gap. So the uptick in the consumer price – sorry, in the consumer confidence index that we have been seeing in the past two, three months now is a positive sign that some of that closure of the output gap may happen and also the improvement in the housing market.
But what I think we’re missing in the story is that this is a structural crisis we have been in. A lot of our medium-term outlook is still linking developments over the next five years to the crisis in 2008 or ’09. And why is this a structural crisis? Well, it’s not just a recession, but we have a fundamental shakeup of our financial markets, of our housing markets, not just in the U.S. but also in some European countries or in China, of energy markets, and of labor markets. And all these markets need to readjust to what some people call a new normal, but in my view is a very uncertain normal. We don’t really know what a new normal is.
So in that kind of very uncertain environment, what you get is that the supply capacity of the economy – we sometimes call it the speed limit of the economy – is actually going down. I mean, it becomes harder and harder to bring unemployed people back into the labor market. If you leave them out too long, it’s hard to get them back in. Many companies are just not reinvesting anymore, so actually shrinking their capital stock rather than expanding it. And a lot of technologies and innovations that companies have but cannot bring to the market, well, if you leave it too long on your shelf, it’s just not going to do much anymore, and you need to start innovating again for the next round in the technology cycle. So that is explaining that in many places in the global economy medium-term, we begin to see the growth rate slowing so that we have a problem on the supply side of the economy that we can only tackle, going to the first point, by making the structural changes in each of those markets. If we can bring demand and supply, which has been out of sync with each other, back into equilibrium, we will be able to begin to grow the economy again. And that’s a very slow and long process. And we see signs of that, of course, in the financial markets, things about all the issues about regulation in the financial markets. We see it in the housing market, we see it in energy markets. So it’s really important for us to sort of select those various forces, because even though the U.S. economy may be strengthening a little next year, these kind of longer-term problems are still going to be with us for a significant period of time.
So really what we’re seeing here – and this is very, very smoothed out. Of course, on an annual basis, the numbers look much more volatile. But what we’re seeing here as an illustration is these – the mature economies, so U.S., Japan, Europe, the blue line, that it’s sort of gradually has come down over the past decades. It is just beginning to improve, but it is sort of staying at not much more than about a 2 percent growth rate in the longer term.
But the bigger issue are the emerging markets, because you can see how much the emerging markets started to accelerate in the 1990s and 2000s, because these countries – of course, China was very important in this, but also India and various Latin American economies that started to catch up and accelerate a growth rate. But now it gets more difficult for them to keep these growth rates up. So you will gradually begin to see them slowing, because once they get more advanced, they have to do much harder work in order to be able to continue to grow.
So that is sort of explaining why we’re gradually beginning to see that slowdown in the global economy. And that is what you see reflected then for the sub-periods here. We look at 2014 and ’18 and ’19 to ’30 and to ’25, you can see that sort of slowdown in the global growth rate every – and the regional growth rates happening everywhere, bringing the global growth down to more like 2.5 percent by the beginning of the next decade.
Now, this may sound like a very downbeat story, and to some extent it is. But, of course, you always need to look at the upsides and the downsides, and I wish that next year, if we get invited again, that my list of upsides will be bigger than my list of downsides, but unfortunately I still end up with a few more downside bullet points than the upside bullet points. And many of the downsides I have mentioned already. At the risk of shocks, which are not in these kind of estimates, we do not – we cannot project a breakup of the Euro area or a hard landing in some of the emerging markets. But of course these are real possibilities and they could significantly negatively impact on the growth performance.
We have major concerns in the advanced economies of getting into a deflationary, Japanese-style of deflation environment. That’s certainly a concern in Europe, perhaps even more than in the case of the United States. But at the same time, in the emerging markets, we get more concerned about inflation, because when that speed limit is coming down, but we still have all these middle classes being added to the consumer pool in emerging markets, the risk of inflationary impulses is quite substantial.
Then of course, there is the issue of the rebalancing of the global economy. Is China indeed able to give more room to the consumer sector? Are Americans beginning to get a better balance between savings and consumption in the longer term? And I didn’t really speak about the risk of protectionist activity. It’s not a drastic rise in protectionism, but we do get a lot of signs that in a slow-growth environment, there is a tendency to begin to protect domestic activity and domestic industries strongly from international competition.
The upsides luckily are there. The always present upside is technology and innovation, and luckily there is a lot of it out there. The point is that it’s hard for companies to sort of make risky investments by bringing those technologies to the market as long as demand is so weak. And really what we need is not just technological innovation, but we really also need innovation in our institutions. And that brings me back to the financial market issues, for example. We need to think about new institutions in the individual countries and globally.
And a real upside, of course, is that there is demands. We do get a lot of demand. We do see a lot of potential demand in the emerging markets. I mentioned the issue of the middle classes that are still increasing in these countries. The question is whether with that slowing speed limit of the global economy we’re able to satisfy the demands to create the new products and the new services that these large consumer groups in different parts of the world require.
So with that, with a little bit of upside that, of course, does exist and that might actually help us to push the global economy back into a more healthy 3 to 4 percent growth rate rather than the 2 to 3 percent or 2.5 to 3 percent that we are currently talking about. So with that upside, I think I’ll stop here and open up for questions so that we’re not only going to talk about the downsides, although I’m sure that you’ll want to know a little bit more about the downsides, too.
QUESTION: Thank you. My name is Ahmed Fathi. I’m from Al Wafd.
QUESTION: My name is Ahmed Fathi. I’m from Al Wafd News of Egypt. I have two quick questions, first about the gloomy look for the emerging markets, especially for the Middle East. I’m looking for the chart, and I see that the percentage of growth compared to 2012 to 2015 almost half, which is a significant drop. You referred that it’s because of the lower prices of oil and the political instability. Political instability we cannot do anything much about it.
MR. VAN ARK: Not we. No, we can’t do anything about it. No. (Laughter.)
QUESTION: As far as the drop in the oil prices, wouldn’t that be a vehicle or a catalyst for overall economic improvement? Cheaper energy means cheaper production overall, affect more or less everything. Would that impact the global outlook for economic growth?
And the second question is about China informal banking activities that’s taking place. Do you expect that the Chinese Government would open the retail banking operations for foreign entities, or they will still remain with the protectionist policies (inaudible)? Thank you.
MR. VAN ARK: Yeah. Great questions. First of all, on the outlook, certainly lower energy prices are a positive for the global economy – certainly short-term. In addition to lower oil prices – officially one reason why oil prices are lower is that alternative energy sources are becoming more important. Of course, the shale gas revolution, in the case of the United States, is actually having a negative or a downside – puts downside pressure on oil prices. Obviously, lower energy prices are good for the global outlook; however, let’s not forget we are still in a slow growth environment, so the demands is still weak for energy. So you’re really going to benefit from low energy prices if the economy is going to accelerate because then we can actually speed it up further.
So we don’t really think that the low energy prices are going to be a catalyst for economic growth; they will help a lot if the other sources that are holding back to improve any growth are going to improve. So if we get the improvements in the housing markets, in the financial markets and so on, and it helps us to accelerate growth, lower energy prices may help.
Why is it a concern for the Middle East? Well, generally, we don’t get that additional demand in the slow growth economy, we only get less revenue in the oil producing economies. And as you know, the oil producing economies in the region are extremely dependent on that particular industry. So in the short term, it’s not going to help our industry, and in addition, the competition from alternative energy sources does require those economies to really begin to rethink their own growth models – more diversification, which has been economic diversification to other non-energy-producing activities. This is a very difficult process in these economies.
So I don’t really think that lower energy prices are going to help the global economy and certainly the Middle East very much. It’s only once we begin to accelerate this is good.
On China, yeah, I mentioned the fact that the informal part of the economy and the banking sector is a major issue, basically because it’s very difficult to control and it puts a lot of instability to the financial system in China on top of the fact that a lot of the policy action in the past half year has been by also allowing the formal financial system to put more liquidity into the Chinese economy. So we are really having a lot of liquidity, pretty low returns at the moment on investments in China, which is not good.
Now, one way to begin to tackle that is indeed to begin to broaden the retail banking sector. I do think that that is a trend that will gradually happen, but we should not forget that we are just in a new administration in the case of China, and the typical pattern of new administrations in China is that in the first year or so, they’re not going to make drastic changes to the policy environment. And clearly, when we looked at the transition in the past couple of weeks, there are no signs whatsoever that there will be a very quick transition towards a more liberal economy, even though I expect, given the nature of the new president, that in due time, once he has sort of put his whole new team in place, that you may begin to see some of those trends.
But again, short term, I would not expect that foreign banks are going to benefit a lot off that regime change.
QUESTION: Yes. I’m I.K. Cush with New African Magazine. I have a couple of questions here. You talked about the need to boost production in the United States, which will stimulate growth. And you mentioned that – I recall a conversation I had a few years ago with former Governor of Pennsylvania, Ed Rendell, who was boasting about his – Pennsylvania’s wood – lumber industry, and that this lumber is harvested and shipped to China and then it’s fabricated – furniture’s fabricated in China, and then the furniture’s shipped back to the United States.
So I asked him, I says, “Well, as governor, why don’t you come up with some sort of initiative to get American furniture manufacturers to fabricate the furniture here in the United States? That way you can create jobs for American workers and then those workers of course will pay taxes, and that kind of thing, and stimulate the economy.” And he said, well, he supports globalization, we cannot compete with low wages in China, and so there’s nothing we can do about it. And he kind of like moved on. So I want you to address the kind of institutional realignment and rebalancing that you’re talking about that needs to take place here in the United States to stimulate economic growth and to boost of workers’ wages the way Mr. Ford talked about at the turn of the 20th century, manufacturing cars pays workers enough so that they can buy his cars, so that he can produce more cars, that kind of thing.
And that’s one. And on China, there’s a lot of optimism about China. I just read an article where there’s concern that the income disparities in China is destabilizing and in fact can create a tremendous amount of political instability in that country if the new Chinese Government leadership doesn’t address that. I don’t know if you can speak on that for a second.
MR. VAN ARK: Sure. Let me start on the last question and then say something about the U.S. And Kathy, you may want to fill in a little bit on that too, and give some color to what I’m saying.
In the case of China – so you don’t find us on the optimistic side at the moment as far as China is concerned. We do think that, short term, that instability is a major, major concern. We do not – as I said earlier – we cannot predict shock, so we cannot predict a bubble, but there are bubbles in China, and the informal sector has a hugely – the informal financial sector has a hugely destabilizing effect on the economy. Longer term, the slowdown that we’re looking at in China has an upside too. And the upside is that that slower growth is reflective of a more mature economy. It’s a natural thing that kind of happens, and that is that once an economy is at about 40-60 percent of the development level in advance economies, then the growth model is changing. You cannot grow rapidly on the basis of borrowing technology from the West or from other advanced economies and will rapidly create growth on exports from that. No, you have now to begin to innovate and to invest in technology yourself; you have to get more high-skilled people in your economy. And you have to deal with some of the issues talking about inequality that you’re referring to, you have to build up social services, you have to create a healthcare sector that works, you have to create a pension system that works, and all these things that help to bring that inequality that is destabilizing in the longer term back to a more stable kind of environment.
We think, therefore, that if that’s the nature of the slower growth, it’s not a bad thing. Because it will make the growth much more sustainable in going forward. So we think that we should not just interpret slower growth in China as a bad thing, as long as it is a gradual progress and as long as it creates an economy that is broader, that has more depth, and creates more room for quality type of growth rather than quantity type of growth.
On the issue of competitiveness and rebalancing, let me just make one comment, and then Kathy may want to add in a little bit from a U.S. perspective. Some of the rebalancing that we’re seeing in the global economy is what I would call an unintended rebalancing. You’ve got a crisis, and that crisis is going to lead to some fundamental changes. One is that the emerging markets after 2008, ’09, naturally did significantly better than the mature markets. As a result, we saw gradually more consumption in many of these economies, even in the case of China, even though the share of consumption in the economy is not growing or even coming down a little. The growth rate of consumption in China is phenomenal, and it is still phenomenal. I mean, it’s between 5 and 10 percent. I mean, if we had half of it, we would be very happy over here. So some of that rebalancing is taking place, but it also leads to higher wages, in the case of China.
In the case of the U.S., where we saw that very weak growth, we have seen one of the characteristics of the weak growth that we’re currently seeing is very slow growth in incomes. As a result, labor costs have come down and that sort of lower labor cost versus higher labor cost in emerging markets has led to some of the rebalancing of economic activity and (inaudible) activity, coming back to the United States. So we see that in the auto industry, we see that in some of the electronic industries. I don’t think this – I don’t think it’s a huge macro effect, but it is important for some sectors in the economy.
The next step is a more intended rebalancing that has to come from policies that create an environment in which capital and labor can move freely around the world, bringing more skilled people to the United States, also allowing emerging markets to strengthen the skills and equality of their workforce. So it’s that intended rebalancing where we still have a very, very long way to go. So that’s from a – more so that I would say micro-competitive perspective. Kathy, you may want to address it a bit more from a financial and sort of macro perspective.
MS. BOSTJANCIC: Well, I think you said it pretty well. I think that the macroeconomic forces have brought about a rebalancing to some degree. A lot of people talk about a manufacturing renaissance in the U.S. and I think there is one happening and – but it’s probably going to be at a much more limited scope than maybe some of the heightened expectations, is what – how I would characterize it.
And if you talked about the emerging markets slowing growth, but you’re also seeing some wage increases in places like China, some of what traditionally have been the lowest cost producers in the global economy. So therefore you’re seeing a little bit of that rebalance where the U.S. worker looks more competitive now. And unit labor costs are maybe lower than they – they are lower than they were before.
So the intended rebalancing I’m more skeptical, actually, happens and takes place. Because that takes lots of fortitude and forward-looking and political will, and I think that’s –
MR. VAN ARK: Political coordination across countries, yeah.
MS. BOSTJANCIC: It’s a lot less – a lot more difficult.
But what does happen in the macro forces is, for instance, if you look at the U.S. housing market or the financial sector, right? Both of them grew very large as a share of the economy. If you looked at it and you were trying to be objective, you would say, “This isn’t sustainable.” And what’s sustainable, therefore, doesn’t become so, and the forces correct and both shrunk. Housing shrank first and now starting to grow back. But the financial sector is shrinking. It probably will continue to shrink for some period of time. So that’s how these macro forces can come to play. And I guess getting back to the original comments from the Governor, I – not to sound cavalier or callous, but he’s sort of right. You really can’t fight the global forces unless you want to put some protectionism in place. And it may not work. Multinational companies, by and large, have to seek out the profit and – not that they should have no boundaries, but you can’t fight the global forces. But now the global forces are tilting back in our favor. The question is: Can we take advantage of that? Can we have proper policy that will enhance that?
QUESTION: If there isn’t someone else, because I really want to follow up on that.
MODERATOR: I think we have other --
MR. VAN ARK: Second round, maybe.
QUESTION: My name is Louise With. I’m with the Daily Newspaper in Denmark. Thank you so much for your time. I have two questions related to the fiscal cliff. One, there is this argument in the business community and in this fix-the-debt group and – that there’s all this uncertainty and pent-up demand, and having a solution or a deal in itself will be a boost to a growth, that suddenly businesses will spend again and invest. So what’s your opinion on that argument? And second, could you weigh in on the whole debate between taxes and cuts –
MR. VAN ARK: Right.
QUESTION: -- and balance there, that would be great.
MR. VAN ARK: Sure. So even though Kathy is our cliff person, I think we start with Lynn on the first question. It’s sort of the confidence question from a business confidence, maybe (inaudible) consumer confidence part.
MS. FRANCO: Right. Well I think definitely what we have right now is sort of a divide between consumer sentiment and business sentiment that we’re seeing in our surveys. CEOs and business leaders are much more pessimistic, and I think a lot of that has to do with this sort of cloud of uncertainty, also known as the fiscal cliff that’s overhanging. And in that type of an environment, they’re sort of waiting on the sidelines before making investment decisions, whether it be in capital or – in terms of hiring and so forth. So we see CEOs right now very pessimistic. And some resolution will, I think, lift some of that cloud. But then a lot depends on what those outcomes might be. So there might be a little temporary boost from decision-making.
Consumers, I think, are sort of on the flip side. I think they’re not sort of quite aware of all of the ramifications of the fiscal cliff. There might be a little bit of sort of optimism that we’ll get to a resolution before 11:59 on the last day. And it’ll be interesting to see, I think, in our consumer confidence survey, now that Hurricane Sandy is no longer on the front pages, the election is no longer on the front pages, but tax hikes and the fiscal cliffs are front and center if that has any impact on sentiment with our next set of readings, because right now it’s not.
Right now, what we’re seeing is that the improvements in the labor market have been sustaining this upward tick that we’ve had in confidence over the past three months. The housing market as well. We’ve seen a tremendous rise over the course of the past year in the percent of consumers saying that they intend to purchase a home, that they intend to purchase durables, obviously, that are going to go in those homes. Even some improvements in auto intentions. So we’re seeing some loosening up of the purse strings, so to speak, some willingness to purchase discretionary items where consumers have sort of been on the sidelines for quite some time.
But again, a lot depends on what happens over the next thirty or so days.
QUESTION: If I can just quickly follow up: How extreme or how unusual is the divergence between business confidence and consumer confidence?
MS. FRANCO: I think this time there is quite a tremendous divergence. Generally, consumers tend to be a little bit more optimistic, perhaps because they don’t follow the economic news as closely as CEOs. But right now what we’re getting is sort of a consumer that you could say is somewhat confident. I mean, we’re still below historically high levels, but we’re getting a CEO confidence levels that are associated with a recession. So that cloud of uncertainty – and I think also what’s happening in Europe and globally also impacts CEOs sentiment and decision-making.
MR. VAN ARK: And it has a direct impact on investment.
MS. FRANCO: Yes.
QUESTION: So why would it only be a temporary (inaudible) if that was removed?
MS. FRANCO: Well I think Europe now is – we’re seeing sort of a little bit more, I guess you could say order restored. That sort of calms the waters. In terms of the fiscal cliff, at least if you know what you’re dealing with, then you can make decisions in that environment. There still might be hard decisions. It might still choose not to invest or not to hire. But right now not knowing what the outcomes are, the safest bet is really to sort of sit on the sidelines and wait until the picture becomes a little bit more clear. And I think that’s what we’re seeing now. We saw that last year with CEO confidence as well, as we had all the deficit – the debt ceiling. And again, there was a big decline until that was sort of resolved, and then we saw sentiment pick up.
MR. VAN ARK: Kathy, do you want to take the second question?
MS. BOSTJANCIC: Just to refresh, what was the subject?
QUESTION: Taxes versus spending cuts. (Inaudible.)
MS. BOSTJANCIC: You gave me the – thank you.
MR. VAN ARK: I always love to give that to you.
MS. BOSTJANCIC: Yes. Well, I think that – I didn’t bring the chart, but if you look at the Congressional Budget Office, they have alternative scenario in their forecast. They have a baseline, but that’s not really quite believable, and even they know that because based on current law. Then they have this alternative scenario –
MR. VAN ARK: This one, right?
MS. BOSTJANCIC: No, this is a longer term chart of revenues versus outlays.
MR. VAN ARK: Oh, okay. All right, okay.
MS. BOSTJANCIC: But we could leave this up here too. So this is the first thing, the fiscal cliff. And the fiscal cliff was created because they couldn’t agree on the medium to long term, right? This was all constructed. It didn’t exist before politicians constructed it because they wanted to force some kind of resolution and deal on the medium-term to long-term outlook. Now they have to get over this fiscal cliff temporarily. But the real issue is how do you close the chasm that exists beyond that? So there’s this gaping hole between the CBO’s alternative scenario on outlays and revenues. That’s the problem, is that outlays are growing far faster than revenue growth, and it’s poised to accelerate, of course, with the baby boomers expiring.
So we’re not going to take a view on how that actually should be done, except from the sense that there’s a framework – Maybe Bart can talk more about it, he’s done some work, and we have done work on it as well, but – you certainly have to be careful about embarking on austerity measures, right? Especially now with the economy still being quite fragile. But you do have to lay out a plan that, over time, the economy can handle and still grow but makes sense and also give some confidence the CEOs and investors that we’re going to tackle our fiscal problems. And the day of kicking the can down the road today is here. We can’t do it any longer.
So that’s – how you kind of balance that is key. Right now revenues, I think, we’re running as a share of the economy, I think – I want to say 18 percent? Or maybe it’s below that. I think it’s actually a bit below that. But long-term average, about 18 percent. Outlays have been about 21 percent. A lot of people would make the claim we need to get back to that, those numbers, 21, 18 percent. So you can do the math of, well, maybe that may mean that revenue has to go up. Now you’ll be getting some revenue increase from the economy going faster, but maybe not enough. And then you really need to moderate the outlays…
QUESTION: Hi. Stephan Alsman from Danish Economics Weekly. One thing you mentioned, Kathy, was about baby boomers retiring. To take that discussion into a little different field of interest is how that’s going to affect the financial markets. When these people, they retire, withdraw their pensions and – basically, what kind of an impact would that have on an already changing financial market – well, liquidity, really?
MS. BOSTJANCIC: Right. Well, it’s a great question. I mean, there’s many different thoughts, I guess, on that. I mean, there is one thought that the baby boomers will withdraw money from the equity market and rely more on fixed income, so it would draw from stocks and go to bonds. Well, I think that’s a lot more difficult to do now in practice, given that the 10-year yield is – the 10-year note is only 1.6 percent. So I think a lot of baby boomers or retirees or about to retire have to rethink doing a more defensive portfolio. I think a lot more are being forced to take on more risk than they’re probably comfortable doing just to get yield and to be able to retire, or even just to live.
So you could – there’s – the global forces are at play, but of course, the Federal Reserve is also exacerbating that with their quantitative easing and the zero interest rate bound. So I think that –you have to really rethink, is it really that bad for the equity market? It may be that the boomers are going to stay in the equity market far longer than was previously thought.
Another asset that’s interesting a lot of people – and the Federal Reserve did a research piece on this before, I believe, the implosion of the housing market – but this thinking that the baby boomers, when they retire, will be very negative for the housing market, well, maybe we already had the housing market correction, right? I mean, you could certainly make that case. So maybe the baby boomers not being able to have two homes – well, first of all, have they been able to sell the second home? (Laughter.) But maybe that whole idea, maybe we already got the correction and maybe the retirement or moving on is not going to have as much of an impact.
There’s these cyclical forces that are in play too. And housing is so underpriced, and there are many people – we don’t make that call, but there are a lot of people who look at equities and say they’re undervalued relative to potential, and that cyclically, if the economy starts to grow faster, you could see some upside there.
QUESTION: Okay. I’m from Vietnamese agency. Just one question about housing sector. Are you confident that the housing sectors keep growing and stabilizings in 2013, and then how much impact of the housing market put on the U.S. economies in 2013?
MR. VAN ARK: Sure. Sure, sure.
MS. BOSTJANCIC: Sure. Well, I think the good news is that we are seeing what looks to be a sustainable recovery here in the housing market finally. And what – the chart that Bart has up here is building permits, U.S. housing – building permits, which is one of the 10 indicators that comprises our leading economic index. What you can see here, it is truly a leading indicator. So it leads many months ahead before we go into recession, and then it typically leads a few months before recovery. Now it’s starting to turn up. And again, it looks like it would have some real legs there, sustainable legs.
You have huge pent-up demand in the housing market. Household formation is running about half of what it would be on trend, about 750,000 versus 1.5 million. Then you have low mortgage rates right now. And you put that – and home prices are rising, so that starts to give some confidence back into the market.
At the same time, there’s still some headwinds out there, which I’m sure you are aware of, that it is more difficult to get a mortgage, maybe even more difficult for people to put a down payment down. But I’m of the belief that if the labor market continues to improve, and if it even starts to improve more rapidly, that confidence comes back. And that will be the spark, and that will really sustain us at the higher levels.
And then of course, housing as a leading indicator is that the knock-on effect that you have for the economy start to create more jobs, you create more wealth, and that leads to more consumption.
MS. FRANCO: Right. And I think we’re seeing some of that. I think that’s sort of one of the underlying reasons why we’re seeing this improvement in consumer confidence. I mean, I think if you just take a step back and you see what happened to consumers at the onset of the financial crisis, I mean, you had the housing market, the values dropped through the floor. You had, in terms of stock prices and in terms of job losses, I mean, hundreds of thousands in those first couple of months, which was extraordinary. We hadn’t seen that in decades.
Now we see that the job market has come back slowly but surely. I mean, we’re still not at pre-recession levels, but there’s been an improvement there, so that’s sort of been one leg of the stool there. We’ve seen the financial markets come back, and asset values in terms of those have improved, so that’s sort of second leg. And then the third leg that’s always been holding consumers back has been the housing market, and now we’re starting to see some recovery there. And we take a look at sort of confidence, we take a look at it across the nine regions of the U.S., we see that it’s even come back in some of the hardest-hit regions – out west, south Atlantic. The only tremendous loss we had this month was in the middle Atlantic regions, which was expected because of the hurricane. But all other regions have really rebounded, so this looks like it’s sustainable for the first time. It’s sort of widespread.
But as Bart and Kathy have said, it’s a slow and steady progression forward. We don’t have an overly confident consumer at this point, but I think enough to help build a little bit of demand.
MR. VAN ARK: Yeah. And I think what’s interesting in this chart – so this is the very latest reading of our consumer confidence – the last reading was last Tuesday – is that it goes into two parts. The blue part is the expectations index, which is looking forward, the consumer looking forward about six months. And then the red one is the present situation, so it’s assessment of the current conditions. And I think what is significant since the crisis in 2008, ’09 started is that the present situation seems to really be on a pretty sustainable growth path now. And it’s still low. I mean, it’s still comparatively low with what we’ve seen before. We’ve come out of a very, very deep hole. Again, this is a long crisis. But at least we are seeing this sustainable improvement, and I think that’s encouraging. So if we get over the cliff or avoid the cliff, whatever you want to call it – jump over the cliff, maybe – then you might see that path continuing.
QUESTION: I’m Wei with Beijing Review in China. My question is also about China, just a very general – I know there are a lot of predictions about how and when China’s economy will catch up with Americans’ economy. I don’t know, I’m wondering if you, Conference Board, will do this kind of prediction. If so, what do you think – I mean, the turning point, or what year will –
MR. VAN ARK: Right. So our sort of proprietary index, as far as China is concerned, is our leading economic index in China, which gives us a signal I showed you earlier, the black line at the top which showed that that leading economic index was still fairly positive. However, as I said earlier, I mean, that upside potential leading economic index is largely different by bank loans, which have been consistently positive, certainly in the last year or so. Most of the other parts of the leading economic index are fairly volatile. Consumer expectations – one month they’re up, the other month they are down. Floor space rented, which of course is – sorry, floor space, which of course is a very important indicator for the – whether or not we’re seeing a bubble in the housing market. It’s very volatile. So we are not confident that the housing market has been really stabilized, and that the possible bubble there may have gone.
So what we’re seeing right now is definitely an upside potential. The Purchasing Managers Index is moving in the right direction for China. That explains some of the current optimism among some businesses, I think, that maybe we’ve gone through the trough and we’re going to accelerate. The point that we keep making is that when we – when we’re looking at the underlying weaknesses in the economy – and I emphasize several times the financial instability, but I would also emphasize the fact that private enterprises and foreign enterprise and state-owned enterprises are not fully in sync in terms of accelerating and improving their performance. There’s a lot of uncertainty out there in the economy. The consumer sector is growing, but it is growing more slowly than it used to. It just doesn’t make us confident that China will easily get back to a growth rate of higher than 8 percent.
So we are much more thinking that it is going to be a gradual slowing, and we just hope that the real risks to the Chinese economy can be avoided by adequate policy in time before some of these bubbles are going to burst.
QUESTION: One question about the stock market: You said jumping over the cliff might be an opportunity, it might be a chance, actually, to do that. You believe that? The stock market seems to be very stable, actually, and very secure and doing pretty well. Do you think the stock market is overvalued or are these – is this jumping over the cliff already priced in? Because it seems to be in contrast with the confidence of – the lack of confidence of CEOs in the United States.
MR. VAN ARK: (Inaudible) have a very different view on this than the nonfinancial market CEOs, but Kathy (inaudible).
QUESTION: Yeah, who’s the smartest guy in the room? (Laughter.)
MR. VAN ARK: Yeah, smartest kid in the class, yeah.
MS. BOSTJANCIC: Well, right after the election, the financial markets had a lot of trouble and worry over the fiscal cliff, and I think you only saw the stock market stabilize once some of the rhetoric out of Washington seemed more conciliatory. So I think the stock market’s very vulnerable to the outcome of the fiscal cliff. If it starts to look like things are going in a bad direction where we may have some – go fully off the cliff or more than what people had priced in, I think the equity market will – it won’t be very favorable to the equity market.
I think the market’s pricing in an outcome that’s probably in line with our view. I think our view is largely – the consensus view is that the payroll tax cut and the extended unemployment benefits expire, but everything else kind of gets bunched together and they do some deal that pushes that – the decision on those other items off several months or at least another year. But if they’re not even able to agree on that, I think there’s – the stock market’s vulnerable.
MR. VAN ARK: Yeah, and also, I mean, I put up the – our short-term forecast here, so this is looking sort of – more our quarterly numbers for the United States. And you can really see that with this – by the way, the Q3 number is now being corrected up to 2.7, right, this morning.
MS. BOSTJANCIC: Yeah, 2.7.
MR. VAN ARK: But you can see that in the beginning of next year, we see that slowing in the economy – 1.4, 1.6 percent. That’s really because that cliff is happening partially, and you can really see that’s coming from slower consumer spending because we’re going to see that right away into consumers’ wallets. And that is, of course, what is a major concern for nonfinancial business. They’re just seeing less consumer spending and saying, “What is going to happen with that?”
But I think if this is really going to kick in in a negative way, I’m sure that financial markets are going to react to that very negatively. So I would not be – I agree with Kathy; I would not be too comfortable about a stable stock market right now. I think they’re all kind of waiting it out and see – and look at the signals of where this is going to go.
QUESTION: Yeah, just a follow-up here.
MODERATOR: Did you state your name and (inaudible)?
QUESTION: Yes, I did. Yeah.
MR. VAN ARK: You did, but you may want to do it again.
QUESTION: Oh. I.K. Cush, New African Magazine. Yeah, I did do that.
With regards to the competiveness of the U.S. labor market, do you think it’s a good thing that labor costs in the United States are now very competitive? Is that good for American workers? And I’m asking that in the context of the Ikea – the Swedish company Ikea. They pay their workers, like, $20 an hour or something like that in Sweden, and then even they moved part of their operation to South Carolina where they pay their workers $9 an hour or something like that, but they did not shut down their Swedish operations.
Could you perhaps address whether or not there’s need for some sort of a paradigm shift in terms of how we look at labor costs? Because if it seems to be working in Sweden where the workers are getting –
MR. VAN ARK: Right.
QUESTION: -- they’re well paid and all of that, then nothing seems to be happening there. Why is it necessary for American workers that their costs – their wages to go down?
And they – Mr. Van Ark, you seem to suggest that the Chinese growth that’s driven by bank loans is a bad thing. But about a week or two ago, Fed Chairman Bernanke complained in a speech that one of the things that’s slowing down the U.S. economy is the very tight credit policies of U.S. banks, and he seems to feel that the banks should lend more money to spur economic growth. Do you want to comment on that?
And Ms. Franco, the consumer --
MODERATOR: That’s good. I think we need to make sure that everybody gets a chance, and we don’t have that much time left, okay?
MR. VAN ARK: Okay. Do you want to have a shot at the wage one, or you want to pass it on to me or --
MS. BOSTJANCIC: Well, you’re the productivity expert.
MR. VAN ARK: No, you may want to take – start.
MS. BOSTJANCIC: Well, I mean, I’m not aware of the discrepancy between countries that Ikea pays, so I can’t really speak to that directly. But I think what you really want to look at is the competiveness. And Bart is being generous; he is the expert in the productivity, but it’s not just the cost, but it’s how productive the worker is. So you could garner a higher wage if you’re adding more value in terms of products or innovation or services. So it’s not necessarily the lowest-cost producer or the lower wages that matter, but it’s the marginal added value that you put into the economy per worker that I think is more valuable.
MR. VAN ARK: Well, I think what’s interesting – both of your questions are really – in one case, comparing Sweden and the U.S., in the other case comparing China in the U.S. – come back to a very, very different institutional setting. So your question about a shift in paradigm, of course, is related to what’s our institutional setting on how do we organize our economy.
So to your first question, Sweden has organized its economy on the basis of relatively high labor cost, relatively high taxes, and premiums that people are willing to pay to have the government play a larger role in their lives. And that gives them a sense of security in their economy that is guaranteed to them on the basis of higher cost. That is an institutional setting that works in the case of Sweden, that the Swedish voter apparently is happy with because they keep governments in place that keep that model going.
In the case of the U.S., we have chosen for a much more flexible market-driven environment, we have a smaller role for government, and therefore increased uncertainty and risk. So I share your concern about the fact that what we have seen since this crisis is that average wage income – but I should even be more specific – particularly the wage income in sort of the middle skill categories of the U.S. labor force have seriously suffered. And some of that is the result of off-shoring, but a lot of that is the result that you have very rapid productivity growth. So once you grow productivity, jobs – some jobs that we lost during the recession are just not going to come back.
So it’s a very different kind of competitors model that gives us greater flexibility, that brings people back to the labor market more quickly than if we wouldn’t have anything of that. But it does create a major concern in terms of lower incomes, and therefore lower spending power, and because of lower spending power, which we reflected in our consumer confidence index, it takes such a long time to get the present conditions index back up. So I have not – well, I may have a judgment, but it doesn’t really matter what my judgment on it is. The recognition is that these institutional environments are quite different.
And this is also true for the China-U.S. comparison. Again, it’s a very different institutional setting. In the case of the United States, we have the issue that there may be a lot of liquidity out there in the economy, but it is largely sitting on the balance sheets of large companies that are facing a very weak economy and just not making the investments to let that liquidity go. At the same time, we have small/medium enterprises which are strapped for cash and cannot really – are not really in a position to make investments. So the chairman is really referring to the fact that we need a little bit more fluid in the financial system in order to let capital flow to those sectors and industries that actually are able to make the investment to kick-start the economy.
China is overloaded with liquidity everywhere and is facing an environment where the return on that capital has really very rapidly gone down because that economy is beginning to slow. There’s so much investment in the economy rather than too little investment. There is so much investment in the economy that a return on it is even falling further. So in that environment, we need to make sure that, again, we’re careful where we put capital, and we have to make sure, again, that capital is going to the areas where it’s going to be most productive.
So we just have to recognize we’re looking at very different environments in the case of both of your questions.
MODERATOR: We’ve come to the end of our hour and we really appreciate your having come this afternoon. It was a very interesting discussion. Thank you very much.
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