Q How would you describe the current economic conditions in this country?
A Economic growth has moderated in typical mid-cycle fashion, yet within specific sectors we see significant divergences in performance. Housing and consumer durable spending have slowed more than usual. On the other hand, non-residential construction and state & local spending have picked up more than usual. Moreover, inflation has picked up modestly and remains slightly above the Federal Reserve’s perceived 2 percent target.
Q What are your economic predictions for the coming 12 months?
A We are in the difficult phase of the economic cycle when real growth typically slows to trend while inflation pressures rise. Over the next two quarters we expect below-trend growth with continued inflation pressures. Inflation tends to lag the real economy, and so inflation remains above the Fed’s target range despite slower growth. We expect that the worst of the housing market moderation has passed but that housing will remain a drag on the economy until the spring.
Q Are there any economic road signs or warning signs the federal government should be particularly concerned about?
A Historically, three road signs have guided the pace of economic growth. First, jobless claims provide the best indicator of job growth and thereby are a good predictor of consumer incomes and spending. Second, capital goods orders have been a reliable indicator of capital spending.Finally, the Institute for Supply Management Survey has provided a fairly reliable indication as to the overall pace of growth.
Q Globalization: How will it affect our economy in the coming 12 months? What are your thoughts on how it will affect your business sector?
A Globalization should neither accelerate nor decelerate significantly over the next 12 months. Rather, globalization is a glacial force (i.e., it changes slowly, but it will be with us for a long time). Although increased competition in markets for many goods and services can cause anxiety in the affected industries, globalization is a very positive force, at least in the long run. Globalization insures that goods and services are produced in the most cost-effective manner, which raises real income.
Q How will the value of the dollar affect us and affect your business sector?
A We look for the dollar to depreciate modestly over the next few quarters. We project that the Fed will ease policy early next year while other major foreign central banks either keep policy unchanged or nudge rates a bit higher. Narrowing interest rate differentials will reduce the relative attractiveness of U.S. assets, making it a bit more difficult for the United States to finance its gaping current account deficit.
Dollar depreciation should help to support export growth while slowing import growth a bit, thereby providing some offset to weaker domestic demand. The effects of dollar depreciation on the banking sector should be rather benign, as long as it remains orderly. A dollar meltdown, which we believe is rather unlikely, could cause capital markets to grind to a halt. In that event, the banking sector would be adversely affected.
Q Taxes: What limits business development most right now? What encourages most right now? What sort of tax legislation would you like to see put before Congress?
A The biggest concern for investorswill be the resumption of higher taxation on dividends and capital gains. Regulation, not taxes, would appear to be the overriding concern of business today.
Q What is your biggest political concern as we go ahead into fall?
A Headline risk from House hearings on drug/medical costs, energy and Iraq policy are our biggest political concerns. These hearings over the next two years will likely be very acrimonious and create negative headlines about corporations and profits. This will likely lead to a negative pall over business sentiment that will likely reduce employment and investment over the next two years.
Q Regulatory reform: How big is the regulatory burden on your business or business sector? What would you like to see reformed first?
A Events such as the attack on 9/11 and the various corporate scandals have resulted in significant increases in the number and intensity of regulations governing the manner in which companies operate. This has led to a significant increase in time and expense devoted to simply complying with regulations. We have experienced strong annual double digit expense growth for several years in our compliance activities. In addition, the “soft costs” and diversion of management attention away from other business activities has been material.
While many of the new regulations have been beneficial to our economic system or national security, it is widely believed that the costs have outweighed these benefits. A serious, constructive and collaborative effort is needed, starting with the requirements of Sarbanes-Oxley, to reduce the more onerous regulatory burdens shouldered by corporations today. There are many industry groups ready and willing to partner with the various government agencies to bring the cost and benefit equation back into balance.
Q Pension obligations: What does this country need to do to manage the financial challenges to pension funding?
A There needs to be greater awareness that pension plans and insurance are a significant component of total compensation, especially for the public sector, and this component of compensation has to be balanced against other forms of employee compensation. Often, pension mandates to the private sector and pension guarantees and enhancements to the public sector are perceived as free goods. Yet, pension costs do impact a company’s ability to compete long-term and provide future employment. At the same time significant growth in public pensions is a burden to future taxpayers.
Q What is your advice to the business community on how to survive and profit from the coming 12 months, and what is your advice for consumers?
A Companies can effectively use this slowdown period in four ways.
First, maintain a focus on diversification of revenue sources in multiple markets and geographies.
Second, develop a turnaround plan for business segments that have been found disappointing over the last six months of slowdown.
Third, continue to promote the business by maintaining marketing initiatives — especially when competitors may adopt a short-sighted, hunker-down mentality.
Finally, prepare by acting in anticipation of economic recovery and identify strategic areas to pursue as the economy recovers — as it always does.
My five tips for young people for success
1. Hard work
2. Ethics
3. Education
4. Optimism
5. Commitment to diversity
My forecast of the three best growth businesses for the next 10 years
1. Health care
2. Logistics
3. Financial services
Part of Examiner’s The American Economy series.
