From Staff Reports

The U.S. economy is humming now and for the foreseeable future, two noted economists said during the 34th Annual Economic Crystal Ball forum on May 3 at UNC Asheville’s Lipinsky Auditorium.

The presentation by Asheville-based ParsecFinancial and the university has, for most of its duration, featured short speeches by David Berson, senior vice president and chief economist of Nationwide Insurance; and James Smith, chief economist at Parsec.

“The U.S. Economy Keeps Sailing Along” was this year’s topic.

 Berson began by saying his predictions from last year panned out rather well. The country has, as predicted, seen tax cuts and regulatory changes enacted that are expected to be good for the economy.

 Job growth was positive, Berson said, but a strong economy requires growth in production as well. 

Because productivity is now slow, with a growth rate around 2 percent, it can be assumed the bulk of wage increases will be financed through increases in pricing, which offset any advantage of a larger paycheck, he noted.

 The recent tax cuts are supposed to incentivize more investment in capital, like more reliable and higher-tech machinery, which should boost production by making it more efficient, Berson said.

Meanwhile, the growth of labor is likely to slow, barring any change in immigration policy, as population growth is trending downward and many of those considered unemployed are 65 years or older, Berson said.

 The current inflation rate for the 12 months ending April 2018 is around 2.5  percent, and there is a big difference between that and 3 percent, which is the average rate of growth since World War II, he noted. 

A 3 percent growth rate is considered optimal, while a 2 percent growth rate is almost recessionary, he noted.

 Berson then said the yield curve was flattening. A yield curve gives a point-in-time comparison of interest rates as a function of contract terms. An inverted yield curve, he said, signals a recession, but the recession usually does not set in for one to two more years.

People will inevitably see the inversion and say, “It will be different this time,” but the probability of something being “different this time” is very slim, Berson said.

 Next, Smith spoke more about the yield curve, noting that since 1901, all 17 times in which the yield curve has remained inverted for at least four months, a recession has followed in a year or two.

Then, Smith said, there were were four recessions that were not preceded by an inverted yield curve. One time was after the Fed prevented banks from lending, and the other three resulted from what he called “the Treasury/Fed Accord,” a decision to keep Treasury rates as low as possible.

 A scenario that contributes to recessions, which policymakers seem to ignore, is returning factories to a civilian economy following wartime production, Smith said. Then, as the economy starts to recover, governments find they are short on defense production, so industry has to ramp it back up. A moderate level of ongoing defense production would buffer the economic impact of entering and concluding any war, Smith pointed out.

 For now, Smith said, the economy is about “as good as it gets.” 

The labor market, at 3 percent unemployment, has only been matched in 1945, 1973 and 1999. There are hundreds of thousands of jobs for skilled employees, Smith said.

He added that if people in the Crystal Ball audience want their children and grandchildren to have a job, they should tell them to study computer coding. 

Community colleges and “sensibly run prisons” are teaching coding; the latter are doing so because they don’t want their clientele returning, Smith said.

There is also ongoing demand for trucker —  and prisoners often get those jobs because they are a rare segment of the population that considers the life on the road an improvement, Smith said.

 Both Berson and Smith anticipated that the Fed will keep raising interest rates. 

To that end, Smith said the routine is to raise rates a quarter of a percent each quarter. That way, the Fed would have room to drop rates if that became necessary. However, if the routine continues, sometime in 2020 or 2021, the yield curve will invert, Smith said.

 However, since a possible recession would take a year or two to take effect, the country is on-track to beat the record for the longest period of economic expansion in U.S. history, Smith said.

Smith added that, to date, the longest expansion period was from 1991 to 2001.