3:00 P.M. EST 
MODERATOR: Welcome to the New York Foreign Press Center. And also welcome to those in Washington that are watching. We're very pleased today to have a pretty distinguished panel here of Wall Street economists that are here to give us their forecasts for the U.S. economy for the year ahead.
From left to right, you're looking at Ken Goldstein, who is the Labor Economist for the Conference Board, Dave Resler, who is the Chief Economist for Nomura Securities and Michael Feroli, who is the Executive Director and U.S. Economic Research for J.P. Morgan.
They'll each be giving a couple of minutes of their overview of the economy and then we'll take questions. So we'll start with Ken.
MR. GOLDSTEIN: Well, just before we came on we were talking about all of us have been interviewed multiple times by folks like you. I was on Bloomberg T.V. about two months ago, and one of the things I said was that the best thing about 2008, it will be over in 12 months. I think two months later the only thing that changes is it will be over in 10.
MR. RESLER: That's your --
MR. GOLDSTEIN: We'll continue later on. Go ahead.
MR. RESLER: Okay. Well, it will be over but the pain may linger on. My view is that the U.S. economy is probably going to skirt the technical recession. I think probably the most frequent question all of us economists get is is the U.S. in recession; is it headed into recession?
One thing we know for sure is that it's not -- well, we don't know for sure I guess -- it hasn't been declining or weak long enough to qualify as a recession yet. As a matter of fact, the data that determine whether or not you're in a recession haven't told us that we're in any month of decline just yet. We might be when we see some more January numbers or we might be in February, but so far the decline in economic activity has not descended to the criteria that the national bureaus uses to define a recession. It still could.
And a report that came out of Ken's shop this morning is a reminder of just how perilously close we are to one. The Conference Board's index of consumer confidence fell to levels that are only seen at the start of or late phases of an economic -- the start of a recession or the late phases of an economic expansion. There's a single exception to that and that was in 2003 when we were kind of more or less out of a recession, but the run up to the Gulf War lowered consumer confidence quite markedly and we didn't go into a long lasting swoon.
We might still do that, but I think the odds are against it primarily because we've had fiscal and monetary stimulus come online in a timely enough fashion to probably head off a recession. That doesn't mean what we're going to go through won't feel very painful, won't be painful to a lot of Americans and won't be a fairly long lasting period of weakness, but I don't think it's going to qualify as a recession. Maybe that's a matter of semantics, but we're probably not going to get completely back to normal healthy economic conditions until we've corrected the overpricing of the U.S. real estate market, and I suspect that will take another year-and-a-half to two years before we've completed the process of adjusting for the price run-up that we've had.
MR. FEROLI: Okay, my view is very much like Dave's. I do think we're perilously close to slipping to recession here in the first quarter or the second quarter. Certainly the data we have so far, as Dave said, has not been telling us that we're in recession quite yet, however, you know, we are going to get some data tomorrow on durable spending in the month of January, and we can always get back revisions to some of the January data we have had. And it may appear to be worse than we thought on initial print, but so far I think I'd agree with the assessment that the odds are we're not in a recession yet, though, there are some indicators here that the next couple of months could be pretty rough going.
And I do concur with the view that as you get into the middle part of the year, you are going to have a pretty substantial boost from both fiscal policy and from monetary policy. I think the bigger question is in terms of fiscal policy whether that is just sort of a sugar rush that stimulates consumption for a quarter or two or whether that's really priming the pump for more sustained growth.
In terms of monetary policy, I think there are also some issues here right now as to whether the monetary policy transmission mechanism is as effective as it usually is. I think there are some reasons to be doubtful that in the near term it's all that useful. However, I think as you get out to a six to 12 month horizon from now you should be feeling that stimulus affecting the economy.
So definitely some pretty rough going here for the next couple of months, and I do think that you're probably not going to get, again agreeing with Dave, I don't think you're going to get something that's really going to feel like sustained robust growth until you do see some of the imbalances in house prices correct themselves and until you do see the financial market and the financial system really regain a position of more durable health. So let's stop there.
MR. RESLER: How do we want to do this?
MODERATOR: Keep talking and once you're done we'll go to questions.
MR. RESLER: Yeah, I just wanted to elaborate a bit on the fiscal stimulus that's going to hit in the middle part of this year. You can count me among the detractors of that plan. I think it's not a great idea to provide a short-term fix to the economy. And I think it's -- a couple of weeks ago I wrote about it and I called it the economic equivalent of HGH. It was the week in which Roger Clemens was testifying before Congress, so there's a lot of focus on human growth hormone and steroids, and in a lot of ways this fiscal stimulus package bears a lot in common with that.
I called it the high growth hypodermic for the economy. It pumps in some growth that doesn't last very long, and in the long run it may leave the economy weaker than it would have been otherwise. We're going to get a couple hundred billion dollars of extra debt to -- for our future generations to carry, all for the benefit of about boosting growth maybe as much as 3 percent in a single quarter, but it doesn't deliver very much lasting benefit to the economy because it doesn't really address fundamental long-run issues. And designing the kind of policy measures that might help in these current circumstances requires more time than Congress or the administration seem to have the patience to devote.
MR. GOLDSTEIN: He's wrong. He's a detractor. Maybe I'm even more of a detractor than he is. One of the numbers we're going to get I believe on Thursday morning is in terms of consumer spending power and consumer spending. Already -- already we're seeing that consumer spending is rising more slowly than consumer spending power. In other words, consumers aren't spending all their money now. If you give them another check, if they're not spending all their money now, they're probably going to take that check, just like we did the last time, and put that check in the bank. So I think that the -- I don't disagree about the detriment down the road; I do disagree about just how much a HGH punch this is going to give to the economy.
And I think the trick here, if we really wanted to put some money immediately into the system, we would have taken the 26 unemployment checks and turned it into 39 week unemployment checks. We would have added more money, maybe the same amount total, but add more money to food stamps. You know that those unemployment checks and those food stamp checks would immediately go into the economy. But for philosophical reasons, we didn't go there. We went to this package. I just don't think this package is going to do us much good.
We reported earlier this week that the coincident economic index rose by 0.1 percent in December and again in January. So I think all three of us would agree that the economy at least, unless these numbers get revised, the economy was not in recession in December, wasn't in recession in January. But with the leading economic index down as much as it is, as long as it has been and as widespread as it has been, and now with this new information about consumer confidence being so low, we are probably dancing right on the cusp of falling into a recession. Either something is going to tip us into that recession, and it could be another bad unemployment report -- at this stage of the game it would only take one more -- or something is going to back us off from that.
But I think the other thing we all agree on is that we're going to be -- whatever this is, we're going to be here for a while, another year, another 18 months. And we're going to be here irrespective of that stimulative package and irrespective of what the Federal Reserve has done or may do. If this economy is going to correct, it's going to have to correct by itself. It's not getting much help and it's not going to get much help from monetary or fiscal policy.
MODERATOR: Let's go to questions. And remember, wait for the microphone and identify yourself.
QUESTION: By criticizing the stimulus --
MODERATOR: Identify yourself.
QUESTION: Oh, sorry. I'm Thomas Jahn, Capital Magazine in Germany. In criticizing the stimulus package, I mean how is your view on inflation? Is it like everybody's talking about this and is it like pushing inflation? And in general terms how do you see a stagflation scenario for the U.S.?
MR. RESLER: I'll take a first stab at it. First on the question of stagflation, that's one of the -- that's the second most frequent question I get. And the answer there is in many ways similar to that answer about recession, we could end up in stagflation but it's, I think, quite unlikely. If we do, it won't be like the stagflation of the 1970s or ‘80s.
The criteria of stagflation is more than just the coincidence of rising unemployment and rising inflation. That almost always happens at the start of an economic recession. The unemployment rate and inflation tend to go up together toward the tail end of a business cycle or beginning of a recession.
What also was present in the ‘70s and early ‘80s when we had that true case of chronic stagflation was it was, in fact, a chronic condition. It lasted beyond the recessions that we had in the 1970 and 1974-75, beyond the recession of 1980, and even a little bit beyond the recession of '1981-82. So it was more of a chronic phenomenon. It did have a policy link to it, but the policy link was global in scale. That's another thing, the stagflation was global in scope.
And the third element besides those things was that we had miserably low productivity growth, half a percent over an entire eight year period in the U.S., half a percent or so in Canada, not much better in Europe, only a little bit better in Japan. And the policy mistake that was made then was trying to counteract the impact of a relative price shift, in that case energy but to some extent food, with stimulative monetary -- primarily monetary policy. We don't have that in place.
We do have monetary policy trying to head off an asset price implosion. It's different in a way than trying to prop up aggregate demand. I do not see the role of monetary policy or the aim of monetary policy currently as primarily devoted toward propping up demand as much as it is to preventing a collapse of demand resulting from the collapse of housing prices.
To the question of whether the fiscal policy might throw into an inflation problem, yes, it could especially if it -- if consumers do not save most of it. In the simulations I've done, I'm assuming they spend less than half of it. So if they spend more of it, it would be more of a temporary pop to inflation.
One of the many problems I have with the fiscal stimulus is it removes an incentive that the market mechanism would impose on most of the economy to cut price where possible or where necessary. The -- I think the assessment of the 2001 fiscal stimulus is completely off base. Unfortunately, I don't have the time to counteract the academic studies that have supported it.
But what really jump started the economy in 2001, it was car companies basically giving away motor vehicles or at least giving them away at zero -- cut-rate financing. We got the highest car sales in U.S. history in back-to-back months and the economy came out of recession just about simultaneous with that. And they wouldn't have been forced to cut prices as much as they did I think had it not been for the post 9/11 collapse of confidence and sentiment.
MR. GOLDSTEIN: Do you want to go?
MR. FEROLI: Yeah. I would just say that I think the general thrust of your question is right, that I think, you know, if policy is successful here in averting a recession, it's almost a case of be careful what you wish for because we are in an environment where resource utilization is still relatively tight having the unemployment of 4.9 percent. If it doesn't move up significantly from here and then we are really able to kick-start the economy in a way that I think most of us are a little skeptical of. But if that does, in fact, happen then you are starting off in a position where you are already at pretty tight levels of resource utilization. I think with trends in productivity not looking particularly robust, you do have to worry about labor costs accelerating here. And I think that may be more of an issue for 2009 or 2010, but it is something I think we have to -- I don't think any of us mentioned inflation in our opening comments, but it is definitely an issue here that I think is looming in the background pretty ominously.
MR. GOLDSTEIN: I think the issue that looms in the background is this: Fundamentally the slow economy is not slowing inflationary pressure, not in energy price; therefore, transportation price; therefore, food price, because you need that energy to move that food to the supermarket. And certainly in terms of wage costs.
I mean average hourly wages last summer were 4 percent higher year over year. It's only down now to 3.7 percent. So a slow economy is not slowing inflationary pressure. And I think the numbers we got this week on the CPI and the PPI are showing that, where they can, business is passing along those costs.
If they can pass along those costs, their profit margins aren't going to get squeezed that much. So, therefore, they don't have to cut back that much on investing and on hiring. If they can't pass those costs along, they will have to cut back on investing and on hiring. If they cut back on hiring, consumer confidence goes even lower. And under those conditions, there's no way to avoid a recession.
So I think one of the fulcrum here -- well, it's always the case in all of economics that price is a fulcrum, right now perhaps more so precisely because a slow economy is not slowing inflationary pressure.
QUESTION: Josef Schrabal. I wonder if you could explain more about the problem as we see that in the financial world which is highly regulated and the Federal Reserve system is known to us older people as very conservative and lately it follows the volatility of Wall Street, jumping up and down in one day, January 23rd, three-quarter of a percent. And how would you see that all this will affect global situation, namely when today are involved the traditional American companies are becoming global companies getting most of their growth and profits outside the United States?
MR. FEROLI: Well, I think you said the problems in the financial system, which is highly regulated. I think a lot of people would probably argue that some of the problems we're experiencing now are not due to over regulation of the financial markets but the opposite.
It is true that the Fed has appeared to be responding, I think, in a perhaps overly sensitive way to the financial markets. And I'm generally a defender of how the Fed has conducted themselves, and I would agree that January 23rd was perhaps a bit of an over-hasty move on their part.
However, I think if you step back and look more broadly, their policy response to date I think has been appropriate given to the tightening in credit conditions and what that implies for the outlook for growth.
So, you know, we can sit here and pick nits with each communication statement and whether it's been effective or not, but I think if you look back a little more broadly, I think the policy has been I think appropriate geared for the changing outlook.
MR. RESLER: I think when the Federal Reserve when they cut rates in January, it was a little perhaps unfortunate that it was juxtaposed with the -- a big decline in global stock markets when our stock market was actually closed. They made the decision at a time when our market was closed, and they made the decision I think after maybe Bernanke got tired of reading criticism over the previous five days for not doing something the previous week when virtually everyone in the market expected them to do so. Well, not everyone but many people did.
And I think that when he met by conference call on the holiday, Monday, he I think laid out an argument that what was going to need to be done in very short order was a lot more than they'd probably planned on doing when they met in December. When they met in December, they may have had in mind another 50 basis point cut if necessary in January. But the economic conditions deteriorated quite markedly between the December meeting and that January conference call. In fact, they had a conference call even before that I think on the 9th of January in which they laid out an argument and a strategy. Apparently they discussed a timing strategy for how much to go.
So I think that rather than wait a week to lower rates 125 basis points, they decided to do it in two pieces and it coincided with a day in which there was a great deal of financial market turbulence. Certainly the -- I was kind of glad it was a holiday because I didn't notice that the rest of the world was selling off by about 8 percent. The Chinese market was down double digit I think overnight. It did have the feel on that Tuesday morning that maybe we were back in 1987 all over again. And I think the Fed can be forgiven, I think, for appearing to react to that. It had plenty of other justification for doing what it did. It has plenty of justification for doing more.
MR. GOLDSTEIN: I'd answer just a little bit differently. If we look at the problems in the U.S. housing market, which are more severe than the problems in the housing market in Spain, in Germany, in U.K. and Australia which also had problems in their housing market, Bernanke, not tomorrow perhaps, but the last time that he testified he was talking about the fact that we know we have already lost over a hundred billion dollars in the real estate market in bad mortgages, in mortgages that simply aren't going to get paid back and that that's not the end of it. That before it's all said and done, estimates are -- range between 250 to maybe $300 billion are going to be lost. Now that's 250 or 300 billion out of a total mortgage market of about $10 trillion. So it's still a small fraction.
But the larger problem is the money leveraged off of that which could be another 300 billion or maybe even 600 billion. One, we don't know. Two, we don't know who has that money. Three, no one government, even the United States, can't regulate that market. If we try, all of those hedge funds would just simply move offshore. I don't know that there is a way short of some kind of global WTO of sorts for hedge funds to sort of regulate that end of the market. And of course, somebody in Dubuque, Kansas is going to lose their house not because they can't afford their mortgage, but because the losses in that leveraged market, which is certainly helping to tighten severely credit conditions, to the point where even good customers, good consumers, good businesses can't get their money from folks like J.P. Morgan.
QUESTION: Lennart Pehrson with the Dagens Nyheter, Swedish newspaper. Do you see the higher inflation now restricting the Fed's abilities to continue to lose monetary policy? And if not, how will a widening interest rate gap affect the dollar?
MR. GOLDSTEIN: Yes.
MR. RESLER: Not yet , and I'll elaborate as I suppose Ken will.
MR. FEROLI: I don't think so. You know, we just -- as I was discussing earlier, we just heard from Vice Chair Kohn just about two or three hours ago, and he continues to have an inflation outlook which sees inflation moderating as we go through the year. And again, a lot of that has to deal with the fact that as I think as the Vice Chair, and all three of us agree here, we do expect growth to be pretty weak. That should put upward pressure on unemployment, downward pressure on labor costs, and that should restrain the inflation outlook.
And I think he's been also pretty clear, while there is a lot of, I think, public attention given to commodity prices and to energy prices, still the degree of pass-through to core prices is pretty limited, at least certainly in the Fed models. It's pretty tough to find a lot of commodity price pass-through to core inflation.
So, you know, I don't think they've really changed their tune too much in the last couple of weeks in terms of reiterating that their inflation outlook is one that sees inflation moderating as we go through the year. So I don't think it's going to be a factor that restricts them at least in the next couple of weeks.
MR. RESLER: The Fed's forecast for the next three years featured -- compared to the December forecast, featured two things that I think caught everybody's eye. One is higher inflation forecasts for 2008 and higher unemployment for 2008. The two would seem to be a forecast of stagflation. At least they're both going up together, how much probably doesn't count as stagflation.
But as I said earlier, that's precisely what you'd expect to happen if the economy is flirting, dancing on the edge of recession. Both inflation and unemployment tend to go up in tandem at the late stages of a business expansion because, in this instance, the shock that's driving inflation higher is primarily food and energy, which is then transmitted impartially to the rest of the economy. But the rest of the economy will -- prices in the rest of the economy will eventually adapt, probably moving down, if those food and energy price levels stay where they are. Other prices will almost have to go down. But it doesn't happen very quickly, and that's why you have this inertia in prices that prevents price offsets to occur simultaneously with price increases.
One thing in reviewing the past stagflation I stumbled upon, and it is kind of an interesting parallel in some ways, in the mid 1970s the -- two things kind of launched us onto that stagflation environment and they're very similar to now. Both food and enegy prices exploded.
Now the energy price explosion was a supply shock caused by an embargo by Arab oil producing countries and that kind of recurred throughout the ‘70s. The other thing, though, was a food price shock. And that, too, was a supply side kind of shock. We're seeing similar things in the food market now.
In the mid 1970s the U.S. Government did something very unusual. It depleted -- the U.S. Department of Agriculture depleted our stocks of stored grains, and I think it did that in 1973-74. Now that was probably not a bad idea, but its aim was to shore up farm prices so that farmers wouldn't be hurt by a declining price environment. Well, Mother Nature came along and delivered a series of crop failures around the world that would have been perfectly -- we would have been perfectly situated to deal with had we not depleted those crops. So that actually aggravated the price pressures that we wanted to have in farm prices and it made them explosive and all kinds of other climatological events that went on at that time that compounded the food and energy price explosion.
This time around, we also had government policy playing a critical role in the explosion of food prices. What? We had our government tell us that we need to make 10 percent of our fuel that we put in our gasoline Ethanol, and it has to be made out of corn, and corn prices have skyrocketed. Every other grain price, which is a substitute in consumption or production for corn, has also exploded in price. So we can once again thank our friends in Washington for giving us some of this food price increase.
MR. GOLDSTEIN: He's exactly right. I mean if you look at the PPI numbers this morning, wheat prices are up and up sharply for exactly the reasons David just gave.
Look, come back to the original question, though. You want to cut interest rates to prop up the economy. You want to raise interest rates, though, to fight inflation. Right now the balance is sort of, you know, let's help the economy; we can deal down the road with the inflation story. So I would not be at all surprised to see the Fed, as much as they moved, not just 75 points in one day but a week later another 50 points on top of that. And I don't think that they're finished. They could lower interest rates still more in the belief that they have to prop up the economy even if that lets the inflation genie out of the bag. They can deal with that down the road.
What's critical here, though, is whenever the economy is on more stable ground -- could take -- the optimists think at least six months and the pessimists here maybe 18 months. But whenever that is, you're going -- I don't know that you're going to see the Fed raise interest rates by 75 points in one day, but certainly they will be as quick to raise rates then as they are now, but the economy has to be more stable than it is right now.
The leading economic index, and certainly today's consumer confidence index, certainly shows us that this is a weak economy in great danger of weakening still more. So the Fed could be excused now, even though inflationary pressure continues to build, by lowering interest rates at this time.
MR. RESLER: A careful reading of what the Fed's policy record has been, statements issued after each of the policy moves and the events leading up to it, I think, make it pretty clear that the Fed is talking about a desire to head off a period of economic weakness. But the real catalyst, the real driving force for the monetary policy easing we've had is to prevent an implosion of credit availability. And in a way we're seeing right now, I think, conditions in the credit market that have to remain very worrisome to the Fed.
We had some encouraging news on the housing market at least in one sense. Housing sales stopped falling. And they did so in a month in which mortgage rates were the lowest in two-and-a-half years. Well, they're back up another 60 basis points since then, and that is probably going to return us to a period of declining home sales.
It underscores that what will help this economy greatly, especially the housing sector, is if we can maintain sub 6 percent mortgage rates for several months and allow some stability to return to that market. But the problem is that the Fed doesn't control the funds -- doesn't control the mortgage rate, credit markets do, and the credit markets are shunning anything that's got risk and that includes mortgages. And that means the Fed has a little bit more challenge ahead of it, I think, in order to get that risk diminished. It may have to lower the level of short-term rates even more than it otherwise might to hopefully to pull down long-term rates across the credit spectrum.
Certainly, you know, the fact that the U.S. Government is able to borrow at less than 4 percent for the next 10 years isn't helping the economy very much. It would help a lot more if you and I could borrow for the next 10 years at 4 percent.
QUESTION: Yanchun Yang from Economic Daily of China. I would like to -- I would have interest in knowing the comment, opinion of the panelists on giving a comment on the reason to this economic trend of the U.S. economy. Because what I was thinking was that it's interesting that retrospectively about a year or 18 months ago when we were talking about the trend of the U.S. economy all the major mainstream economists were much more optimistic for the result and now, I guess, it's too much the contrary. All the mainstream economists are if not very gloomy, I mean seem to be quite pessimistic.
So my first question is what -- if we are on the threshold of a recession in a moment, what was the reason for those people or the majorities of people were over optimistic a year or 18 months ago given it was a common sense the real estate sector had ripple off effects everywhere then? And if we are at the real critical point of recession now, what is the -- could there be any reason for people to be over pessimistic? That means in the time to come in the year or two, besides in -- I mean I know that many sectors will have to suffer from this slow growth or even stagnation, but will there be any sector or proportion that can get benefit out of this?
Also, I mean on the Government's side -- on the regulative function side, given if the economy is extremely slow, it arouses the concern of the government especially the political party in the coming context of the U.S. political arena after the new Presidential election, do you think there will be more regulation to be released to the market both domestically and internationally or -- I mean I would like to have your opinion also on the global economy context of the -- on the impact of the U.S. economy. Thanks.
MR. GOLDSTEIN: I want to start with the idea that if you look at our consumer confidence number, and specifically at our expectation number, all through 2007 until you get to September-October, you know, the housing market was already more than a year down; energy prices were already very high. Yet, consumer confidence in April and May, June, July, August was still relatively steady so that this was, through that period, a very resilient consumer. Because the consumer was so resilient, business could continue to produce, to invest and to hire.
What changed, and it changed in the September-October period, and I think you can measure it in terms of consumer expectation, was not concern about the shoe that already hit the floor, not the housing market, not the stock market that went crazy in August, not energy price, it wasn't concern about the shoe that hit the floor but about what's coming next. And specifically what started to spook the consumer in September and October was that the housing market -- the labor market was going to slow. It clearly did. We lost jobs in January. And that prices, as we've already described, would start to go up.
So that what spooked the consumer was that my spending power growth would slow or at least hold level while what I spend on goes up, squeezing my budget and, therefore, pulling me as the consumer into the bunker.
And so the way I've described this is you put consumers in the frame of mind, if I don't have to do it now, I'm not going to do it now, buy a car, buy a new refrigerator, replace the old sofa, whatever. And business is looking at this saying, if that's where the consumer is, then this is not the time to invest. It may not be the time to hire and -- especially if we can't pass costs along in the form of higher prices so that our budgets are going to get squeezed.
What's critical in this view is it's not about what happened but about what's coming next. And therefore, the kind of report we got on the labor market in December and especially in January led to the kind of declines we saw in consumer expectations that we reported yesterday. If that number next Friday is less than 50,000 jobs, I think we would continue to spin in and, therefore, spin off the edge and into recession.
So, in other words, either these fears get confirmed, fear about what's coming in a labor market, what's coming in terms of prices, get confirmed -- at least at the moment it appears that they are -- and that spins us in. Or those fears turn out to be unfounded and we back off a little bit. But we certainly are, in my opinion, right on the edge.
MR. RESLER: I think you've raised a number of interesting questions. The first, why were we all so optimistic a year-and-a-half ago and now seemingly so pessimistic. I think for the most part most economists expected a kind of run-of-the-mill housing correction in which production of homes would be -- would decline, we'd reach a bottom, a higher bottom than we reached, and that fm thereon housing would no longer be a drag on the economy and, in fact, we might even start to get a boost to growth from housing.
Well, what the big surprise has been is the depth and duration of the housing production contraction. There's a wide range of opinion about house prices. There were many people saying that we'd have a big house price correction. You put the big number on it that you feel comfortable with, but there were people predicting declines of 10 to 20 percent. We're down 10 percent on the Case-Shiller Index over the last year.
I think, though, that most economists did not want to -- maybe we didn't want to believe it, we didn't factor it into our forecasts, and I think it may be what Ken was eluding to last summer, too. I think consumers were also generally in a state of denial of what was happening to the price of their biggest asset.
The University of Michigan survey shows surveys of consumer's views on what happened to the price of their homes, and it was remarkable that last summer and fall a third of consumers still thought the price of their home was rising. Now maybe it was, but maybe they have a disproportionate number of people who have houses in Manhattan. But for the most part I think there was a denial of the reality.
Now there may be too much fear of how deep it can get. The things that could keep the economy -- make the economy perform better I think are the same things that have helped it in the last year-and-a-half and that is if we continue to see strong growth in your country and the rest of Asia, pulling in, propping up demand for U.S. manufactured goods, that could keep us from sliding into a slump. And in a kind of weird sort of way, today's PPI Report might actually have some encouraging news in it.
The fact of the matter is that capital goods prices almost across the board, across virtually every major capital good that we produce and most of which we export, was up in price fairly significantly. It was a four-tenths percent index rise. It was up four-tenths of a percent two months ago as well, and that could be an indication that demand from overseas remains very strong. And we might get surprised with the durable goods orders report tomorrow. If we are, that will be good news for the economy and it will keep us from -- it will reduce the odds of slipping into a recession this quarter, although, I do think we're declining in real output this quarter.
QUESTION: Do you think that businesses would be helped (inaudible)?
MR. RESLER: Do I think what?
QUESTION: Do you think the U.S. (inaudible) will be (inaudible)?
MR. RESLER: The U.S. budget deficit?
QUESTION: Yeah, in terms of the trade (inaudible).
MR. RESLER: Oh, the trade deficit's going lower, and I think that's going to continue. Whether -- it will probably go lower faster if we go into a recession because we'll import -- imports are normally more sensitive to output or GDP growth than exports are especially if the rest of the world's economies are going to at least relatively better.
I do not subscribe to the notion, though, that we have been decoupled from the rest of the world. The rest of the world will slow. It is already slowing.
MR. GOLDSTEIN: It is slowing.
MR. RESLER: And I think the big question mark in my mind is what happens to the growth in China once the Olympics are done.
MR. FEROLI: As far as the question what has changed that has made us as a group I think more pessimistic, I do think we're agreeing that there is an element of sort of reassessing the downturn in the housing market and how steep that is. But I wouldn't want to sort of give short shrift to the increase in energy prices that has taken place over the past six months.
You know, as we sat here in June and July of last year, oil was at $65 a barrel. If you gave me -- it has since obviously gone up to about $100 a barrel. If you gave me tomorrow a $65 barrel of oil, I'd be a lot more optimistic about, you know, the consumption outlook for the next two or three quarters. So those are -- you know, there are facts on the ground that have changed, and I think you have to respond to those facts changing.
I do think you're right that, you know, now maybe the pessimism is slowing in the opposite direction and, you know, it's not all terrible for the U.S. economy. Clearly, net exports are a source of growth, and I think they will continue to be over the next four quarters. Maybe not as robust a source of growth as they were over the last year, but I do think they will continue to contribute to growth.
There is some health in, you know, other parts of the U.S. economy. I think corporate balance sheets look pretty good, and I think inventories are pretty lean. And you know, if we get a period here of, you know, four quarters averaging maybe a percent on growth, yeah, that's definitely below what the trend in growth, which I tend to think is around 2½ percent. But let's not get carried away, that's not -- you know, we've had a lot worse outcomes than that and I think, you know, it's a healthy correction and maybe sort of a great moderation has raised our expectations in terms of what's attainable, in terms of output stability. If we do get sub-par growth over the next year, I don't think it's, you know, necessarily a sign that there's something fundamentally wrong with the U.S. economy.
MR. RESLER: I think he's absolutely right. The run-up in oil prices, energy costs generally especially late last year have been a big catalyst to a decline in discretionary consumer spending or a slow-down in discretionary consumer spending.
Last -- normally consumer spending in current dollar terms on energy is about somewhere around 3 percent of total consumer spending. Last year it got close to 4 percent. And of the incremental dollars spent last year, over nearly 20 percent of those incremental dollars went to gasoline alone, yet, we didn't buy any more gasoline or not a lot more, we just paid a lot more for it. That left less for everything else. And it's that everything else that's kind of fueling -- normally fuels the economy's expansion. And until oil prices reverse course, that's going to be a continuing drag.
QUESTION: Do you expect them to reverse?
MR. RESLER: Yeah, I -- well, I think oil prices -- if the U.S. economy is in the kind -- if we're right about the economy, I don't see how oil prices can stay where they are. They will have to go lower, and I would say $20 to $30 lower, but not quickly.
MR. GOLDSTEIN: I'll bet you a dollar that does not happen.
MR. RESLER: You're on. I said 20 to 30; I'll take $1 for 20.
QUESTION: Roland Freund, German Press Agency. I would like to get a little bit deeper in this export issue and the decoupling, and maybe you could focus a little bit on Europe. So how dependant is the U.S. on the European economy especially in the last few quarters the corporate earnings got a lift from Europe, especially due to the strong currency over there? So how depending is the U.S. on Europe and what's the impact of Europe on this question you are discussing?
MR. RESLER: I am not actually sure what share of our trade comes from Europe. I think it's much smaller than it is from Asia. I don't have that right at the tip of my recall button here. But the slow down in Europe will, especially to the extent that it's going to slow capital spending, will be detrimental to the U.S. economy. It will be -- there's a feedback loop. U.S. slowdown hurts the rest of the world, but the slowdown of the rest of the world hurts U.S. growth and it diminishes the benefit we get from the trade sector. And my concern is that if we do see -- if we are going into a period of slower global economic growth, markedly slower -- let's say a percent slower than the last couple of years -- around the developed economies, then we're going to have less growth in capital spending, and that will hurt our trade picture.
MR. FEROLI: I also -- my recollection is that the share of exports to Asia is a little higher than what it is to Europe. And I think actually if you look at the growth, I'm almost certain that it's been much stronger in terms of real export growth to Asia in the last year.
I don't expect growth in Europe to slow enough that it's going to be a very noticeable drag on the U.S. partly because I don't expect the slowdown in Europe to be sharp; and secondly because, as I mentioned, the growth in exports has been more skewed toward Asia.
MR. GOLDSTEIN: I think one of the points your question really brings up is that not that there's a slowing in the global economy so much as a maturing in the global economy so that even if the U.S. housing market had never gone to pot, and energy prices had never gone through the roof, we would be looking at slower growth across the globe with two exceptions perhaps, simply because the expansion, the global expansion coming out of 2001 was finally beginning in 2006 and 2007 to begin not to slow but to mature.
We can see this in terms of the leading economic indexes that we do for different countries. We do it for eight or nine countries. We don't do it for all 200, but the eight or nine that we do accounts for about 65 percent of global GDP. And it shows exactly what David was talking about. You can take these economies, in North America, in Western Europe, in the Pacific Rim, and it's almost like one of these bicycle races in the Olympics where they're all in a pack. Well, because of the housing crisis in the United States, we fell out of the pack. That's not a decoupling.
But, in fact, what's going on is that strength elsewhere is pulling us back to the pack. Our weakness is pulling down the pack. You can see this more clearly in Western Europe. The two exceptions perhaps are China and India only because they're still building up their infrastructure in a way that is not true or is already -- you know, in North America and in Europe our infrastructure has largely been built.
Although, one of the things, coming back to an earlier question, is the new administration I think you can clearly anticipate a lot of money going in to make sure no more bridges in Minnesota fall down. That could mean that after the election there's going to be a tax increase but only if the U.S. economy is much stronger.
MR. RESLER: I think there's one part of the decoupling story that's been maybe not overlooked -- that may be too strong a word -- but has been missing from most of the discussion. When economists and others have talked about decoupling, I think the stress has been on the following, that Asia, India and China and so on are in the process of becoming or generating endogenous growth. It doesn't depend on growth from outside; doesn't depend on their exports to the rest of the world; that you've got hundreds of billions moving into the middle class in Asia; and that's going to provide a major impetus to growth independent of what happens in older, more advances economies in Europe and in the U.S.
But there's an element of coupling that has never been there before and that is in the financial market coupling. You know, who would have guessed -- all of us were wrong about the housing market to some extent or another. We were all wrong to some degree. I don't know anybody who would have predicted, though, that the first nationalization of a bank because of the housing market would come in England, and it wasn't because of what happened in the British housing market explicitly, although that is now getting to be a big question mark I think, Britain, Spain and other parts of Europe.
My belief had been -- maybe I was breathing the same vapors that caused me to be optimistic about the U.S. market about the U.K. housing market. I thought well, okay, what's different about the U.K.? Well, it's kind of like Manhattan squared. It's just a bigger Manhattan and you've got all this money from the rest of the world outside the U.S. wanting to own property in London for whatever reason, so -- and in the U.K. So that's going to keep -- global demand for real estate in England is going to keep prices there high. Well, I think we're now -- I'm now starting to doubt that scenario. And what we have is this coupling of global financial debt and assets that makes us all inter-dependent in significant ways.
MODERATOR: We've got time for about two more.
QUESTION: David Barroux from the French newspaper, Les Echos. A question related to the elections. John McCain has been quoted saying that he was not expert on the economy. Do you think it's -- are you worried by that? Do you think that this could have an impact or not really worried? And the following question linked to that is do you know what his economy policy might be? Has he given any clue on what kind of Republican he might be?
MR. RESLER: I'll start the answer to that. If McCain says he's no expert on the economy, I'd rather have in many ways a non-expert than somebody who believes themselves an expert, which seems to be the two Democratic candidates.
Frankly, I find the proposals coming out of the two Democratic candidates frightening. They are talking about on the campaign trail the large budget deficits that the U.S. is incurring, yet, they're making proposals every day that commit us to new kinds of welfare plans.
I just did a quick present value calculation of Barak Obama's plan to give $4,000 of tuition tax credits to college students. Since there are roughly 10 million college students now, if you assume that even half of them get it, it's going to be a -- the present value of the debt that we'll incur over, assuming it's going to be in perpetuity -- you know, you can't give it to your oldest son but now your youngest. And that means you can't not give it to your grandchildren -- it's going to be hundreds of billions of dollars of present value of government spending.
McCain admits not to knowing a great deal about the economy, which gives me some optimism that maybe he'll surround himself with people who do.
MR. FEROLI: In terms of, I guess, the more shorter term outlook, I think of all the candidates who are remaining. My suspicion is that all of them would reappoint Ben Bernanke provided things don't turn out terribly in the next couple of months. And neither of the three -- none of the three seem to be particularly or ardently protectionist in their trade policy. So in terms of sort of a business cycle frequency, those are the two things that I would be most concerned about. None of the three seem to be, you know, that threatening in that regard.
In terms of tax and spend policy, obviously depending on whether you're a Democrat or Republican, you could argue there are going to be efficiencies in public investment and so forth. And, you know, I know smart Democratic and Republican economists who argue in both ways. However, even of those smart economists that I know, I don't think any of them argue that those effects are going to be felt over a one, two or three year horizon. So in terms of the business cycle and things that I'm concerned with, I don't see that impact as being crucially affected by the outcome of the November election.
MR. GOLDSTEIN: Irrespective of who wins -- and not just who wins the White House but who wins in the Senate and the Congress -- can they find a way to get resolution in central Asia, not just in Iraq, at a lower cost? Are they going to keep the bridges in Minnesota from falling down -- and bridges, sewers, tunnels? Plus, some of the gray beards around here are going to start to retire pretty soon, the Baby Boom Generation. That's going to cause medical care spending, social security spending. How are we going to afford all that when we've already got a deficit even if we didn't do a (inaudible) package? That tells me it doesn't matter who gets elected, taxes are going to go up.
MR. RESLER: I would take exception to the observation about trade and protectionism, though. In the last couple of days it seems like the big campaign issue as Clinton and Obama are vying for Ohio and Texas is which one can retreat faster from NAFTA.
Hillary Clinton, who has a long record of supporting free trade, seems to be running away from it as fast as she can because her -- the person she's running against is criticizing her for the job losses in Ohio and blaming it on NAFTA. I think most economists would agree that a fair assessment of NAFTA is that it has not cost the U.S. any jobs at all in Ohio or anywhere else. I grew up in Ohio, and I know that that's not why they're losing jobs. They're not losing jobs to Mexico, to Canada or anywhere else, they're losing jobs to West Virginia and Tennessee.
MR. FEROLI: I guess I was thinking relative to say, like, John Edwards they don't seem as protectionists now. It comes down to I think your interpretation of whether what's going on now. It's primary season, grandstanding, which sort of comes back when you get to the general election.
I guess the fact that we haven't seen it up until now maybe was supporting my way of thinking, but I can obviously -- certainly the rhetoric in the last couple of days has not taken a kind turn toward free trade.
MR. RESLER: In one sense, the kind of a preview of what's going to happen post election may have been what happened pre-primary or middle of primary, which is the speed with which Congress passed the fiscal stimulus package. In late December, the -- a few people started talking about a $75 billion package, and by the time -- a week later it was $125 billion, then it was $140 when Bush first proposed it. Two weeks later -- three weeks later it was signed into law as a $160 billion package. So we have a perfect example of U.S. political compromise in the face of overwhelming urgency, and that is if you want $100 and I want $200, we'll compromise and the government will give us $300.
MODERATOR: We have time for one more. Diego.
QUESTION: Thank you. Diego Senior from Caracol Radio in Colombia. The question is about you were talking about the impact on other economies but not Latin America, the dependent economies on the U.S. and this issue especially mine, which is trying to get approved in Congress and FTA with the U.S. The three of you, please. Thank you.
MR. GOLDSTEIN: It is not that Latin America is an after thought but that most of the action that will drive whatever does or does not happen in Latin America will take place between Western Europe, U.S. and Central -- and the Pacific Rim. You well know because you come from that part of the world that there is an absolute death struggle for jobs, specifically in terms of textile jobs. Between every job that grows in the Pacific Rim, there's a job that does not grow in Latin American and vice versa.
No matter what happens in our political cycle and no matter what steps we take fiscally or monetarily, that's not really going to change that struggle between those two dynamic partners.
What we could do, perhaps, is to look at foreign aid. But as you well know, foreign aid is a four letter word in the United States no matter who we give out to. So -- and I don't think that's going to change come November, no matter who wins in November. That's at least my two cents.
MR. RESLER: And I don't really have -- I don't track our trade and economic issues with Latin America very much, so I really -- it's sad to say I can't answer your question.
MR. FEROLI: To be honest about the impact of passing free trade agreement with Colombia, I'd have to defer to our Washington analysts on that. I'm not following the developments in Congress that closely.
You know, I am surprised, just given the amount of trade linkages with certain countries in Latin American, in particular Mexico, that we haven't seen a more pronounced impact of U.S. slowing on Mexican numbers yet. But you know, again, this could be one of those things that's just lagging so.
MR. GOLDSTEIN: I think your answer, then, is the benign neglect to Latin America may not change after November. I wish that weren't true, but that may be.
MODERATOR: All right, thank you very much to our panel. Thank you all for coming.
