Economic Forecast Luncheon offers clues for 2017

Rue Patel, general manager of General Mills’ Cedar Rapids plant, discusses sales and marketing trends during the EFL panel session with four other Corridor leaders. PHOTO ADAM MOORE

By Dave DeWitte
dave@corridorbusiness.com

Economist Phil Levy wasn’t ready to predict an end to one of the nation’s longest economic expansions at the CBJ’s 2017 Economic Forecast Luncheon, but tempered expectations with three risk factors that could stop its momentum.

Nearly 600 Corridor people turned out on Jan. 18 to hear Mr. Levy and a panel of five Corridor business leaders discuss economic prospects for the year ahead at the DoubleTree by Hilton Cedar Rapids Convention Complex. The event was presented by Bankers Trust with support from Van Meter, ITC Midwest, Kirkwood Community College, Meardon, Sueppel & Downer, Skogman Commercial, the Eastern Iowa Airport and Northwestern Mutual.

Mr. Levy, a senior fellow on the global economy at the Chicago Council on Global Affairs, began with an overview of favorable trends in unemployment, GDP growth, and stock prices since the 2008 recession, and cited the Wall Street Journal’s 2017 economic forecasting survey (available at http://bit.ly/2017forecast).

“The growth is really tepid,” Mr. Levy said. “Nowhere in here do you see the kind of raging recovery growth you expect to see after a recession.”

Economists polled by the Journal didn’t see much change in that trend for 2017, and projected a slightly lower risk of recession.

The United States unemployment rate of 4.7 percent is arguably at what economists consider full employment, Mr. Levy noted, although he said that issue is disputed because of the number of Americans who’ve dropped out of the labor force. GDP growth has been relatively consistent, around 2 percent.

Stocks have also been up by healthy margins in the past year, Mr. Levy said, citing a sort of “joyous reaction … to the election results.” He said the markets seem to see the election as a sign that portends pro-growth policies, adding, “We’ll see if they’re right about that or not.”

The baseline he described for the economy painted a “reasonably rosy scenario that things are going reasonably well,” although there are plenty of risks to the future of that scenario.

The first is the length of the current economic expansion, which has been creeping along for eight years at a tepid rate, despite large doses of economic stimulus.

“Historically, we are due for a downturn,” Mr. Levy said, describing the recovery as “a bit long in the tooth.”

Global risks abound

Mr. Levy’s specialty is global economics, having served as senior economist for trade from 2003-2006 for President George W. Bush’s Council of Economic Advisors, and then as a member of Secretary of State Condoleezza Rice’s policy planning staff covering international economic issues. He did not support Republican nominee Donald Trump in the past presidential election, however, joining a sizeable group of former Republican advisors who supported Democrat Hillary Clinton.

Leading Mr. Levy’s list of global risks was the European economy, specifically Greece’s sovereign debt crisis, Italy’s banking crisis, high unemployment and the vote last year by the United Kingdom to leave the European Union (EU), known as ‘Brexit.’

“Europe has seemed to be a crisis about to come for about four or five years now,” he said, joking that he was almost embarrassed to bring it back up.

While current concerns echo those heard during 2012’s Greek debt crisis, he said those problems still haven’t gone away, and that Italy’s banking system problems involve a much larger part of the European economy with greater ramifications. He also pointed to opposition to EU immigration policies, several upcoming elections and the potential impact of Brexit as factors that could further destabilize the EU.

Studying a comparison of unemployment rates among EU countries, Mr. Levy said the average rate is near the level of U.S. unemployment during the worst period of the Great Recession.

A bigger problem, however, is the huge variation in unemployment rates among EU members, he said. The EU has one common monetary policy governing all its members, he said, but has a huge variation in economic performance, from healthier countries like Germany that have to worry about inflation and economic overheating, to countries like Spain and Italy that haven’t yet recovered, leaving big unemployment issues.

“If you want to see something really shocking, look at their youth unemployment, which is somewhere in the 25-50 percent range,” Mr. Levy said.

China’s slowing economy and high national debt were next on his list. The country has traditionally been viewed as a fast-growing economy with decades of double-digit growth, but that appears to be changing.

“Now, we have more recent numbers,” Mr. Levy said. “You really should not believe these numbers. These numbers are almost certainly cooked – if you’re an up-and-coming Chinese leader and want to be re-elected, you make your numbers. But even with the cooked numbers, you’re getting a dramatic slowdown.”

Mr. Levy expressed differences with the prevailing view that China has manipulated its currency to increase exports and reduce imports. The value of China’s renminbi in exchange for the dollar has gone down, he said, but that’s largely because the dollar has gone up in value. The renminbi’s value relative to a broad basket of international currencies has actually gone up, he said, and China has spent the equivalent of more than $1 trillion to keep the renmenbi, or yuan, from falling.

“Not only do they have slowing growth; they’ve had an enormous buildup in debt,” Mr. Levy said.

An IMF statement on the topic said China’s debt risks “appears manageable if the problem is addressed quickly,” Mr. Levy noted, adding, “In IMF-speak, this is ‘act now – a crisis is looming.’”

Trade uncertainties

Uncertainty about the future due to United States trade policy was the third area of risk cited by Mr. Levy. He noted a Wall Street Journal article calling the team of economic advisors the incoming administration is assembling is the “the most protectionist crew we’ve seen since the 1920s.”

President Donald Trump appeared to win over many voters by expressing concern about the loss of American industrial jobs due to trade deals that allow American companies to import goods formerly made in the U.S. from countries where labor and regulatory costs are lower. He has promised to renegotiate trade deals to help bring jobs back, but Mr. Levy sees several problems with that approach.

“There’s often a conception that we have exporters and we have importers,” Mr. Levy said. “If we want to address a trade imbalance, we do less exporting and more importing.”

Citing data from the Peterson Institute for International Economics, Mr. Levy said there’s a large overlap between the two categories because many U.S. companies have international supply chains. As a result, he suggested trade deals that protect those companies by raising the price of imports could also seriously disrupt their supply chains.

That’s a separate problem from the issue that U.S. trade partners likely won’t stand still if the U.S. institutes big duties on imports.

“The more standard concern is if you start slapping your trade partners, they’ll slap back,” Mr. Levy said.

Bankers Trust Market President Pat Deignan, who introduced Mr. Levy, asked him to expand on the contrasts between Chinese President Xi Jinping’s recent speech at the World Economic Forum in Davos, Switzerland, in favor of free trade and the protectionist rhetoric of President Trump.

“The U.S. seems to be abandoning its traditional leadership role a bit in terms of creating a global trading system,” Mr. Levy responded. “President Xi is happy to step in there and expand China’s grand ambitions.”

Mr. Levy said China benefits enormously from free trade and can sing its praises, but that its track record of support for the idea has been uneven. While President Xi came to power saying that free trade would be the primary driver of the Chinese economy, he said it’s actually been the support of state-owned enterprises that has been his primary strategy for achieving growth.

Forecast limits

Mr. Levy acknowledged that he considers himself more of a careful observer of the economy than an economic forecaster. He said one of his observations is that most forecasters extrapolate from past economic trends into the future, and rarely forecast sharp breaks.

Invoking words of the late Herb Stein, chairman of the Council of Economic Advisers under former presidents Richard Nixon and Gerald Ford, Mr. Levy expressed his thoughts on the inevitable shift in the economic recovery cycle: “If something cannot go on forever, it will stop.”

“Herb Stein didn’t really offer guidance on when it will stop,” Mr. Levy said, explaining that he wouldn’t either.

The Chicago Council on Global Affairs is an independent nonpartisan membership organization that strives to inform and influence public discussions on important global issues. Mr. Levy is the council’s senior fellow on the global economy, and an adjunct faculty member in Northwestern University’s Master of Business Administration program.