An Interview with Bill Strauss – Senior Economist at the Federal Reserve Bank of Chicago
By Elise A. Couston, Sr. Managing Director at Newmark Grubb Knight Frank
As we move into the fourth quarter of 2014, I thought it would be a good idea to see how one of the experts sees the economy as of the end of the second quarter, and going into 2015. Below are Bill’s comments on where we are headed.
Elise Couston: Where are we in the current economic cycle, as of the end of the second quarter of this year? Bill Strauss: We have completed five years of the recovery / expansion. The “recovery period” is when you recover all of the lost output, and we did that a couple of years ago when the economy fell by over 4 percent. We are about 11 percent higher from the trough quarter. But, all in all, the recovery has come in at a fairly moderate pace.
Growth over the last 5 years is at 2.2 percent, which is the normal trend that we think about—anywhere from 2 to 2.25 percent. That is very disappointing when you really need to grow faster than the trend to remove the slack that was built up during the downturn. So, even today, while we have now five years under our belt for the expansion, there is still quite a bit of slack remaining in the economy.
Now, after World War II, recoveries typically lasted about five years, so some people are a little nervous about that, but, it really would take an economic shock to end an expansion. I think much of the risk is really beyond the borders of the US when you think about the political instability that is taking place both in the Middle East, as well as with regard to the Ukraine area. Economically, I think one of the bigger risks is actually in some of the Asian markets, in particular, China. What are the strengths in the economy at this time? Bill: I think manufacturing continues to remain a very vibrant part of our recovery. We are producing more in the United States than ever before and we have recovered all of the lost output during the Great Recession. During the downturn, manufacturing was severely hit, with a decline of output in excess of 20 percent, which was largely focused in the more traditional type of manufacturing, such as auto, steel, and heavy machinery, as we are all aware. In June of 2009 we had a couple of our major auto producers—GM and Chrysler—who went into bankruptcy right at the trough of the recession. That being said they have recovered very strongly. Vehicle sales are now at levels that are well above where we were before the recession began.
We continue to produce more now in the United States. The Boston Consulting Group put out a study last year which illustrated that the U.S. produces about 24 percent of world economic manufactured output. Considering we are only 5 percent of the world’s population, that really is an impressive amount. And, China, which everyone thinks of as producing everything in the world, only produces 16 percent of the manufactured output globally. So, we are doing pretty well.
What, if any, frailties are there left in the economy as of now?
Bill: I think the housing market still remains a very challenged market, and I think it could be hampered by the current lending environment. The Federal Reserve does a survey of senior loan officers, and lenders seem to be suggesting that they are currently tightening conditions in the mortgage market, however they never really loosened them up following the Great Recession. The fact that they are now tightening them even further will probably have some negative impact on future opportunities for people to buy homes.
I also think that the consumer remains very cautious. I think the frailty is that consumers are—all in all—not very optimistic, and that is restraining them from not going out and taking on some additional spending risk. With the slack in the labor markets, we are not seeing the kind of wage gains that give consumers confidence.
Where do you see the minimum wage debate headed?
Bill: That is more of a political than an economic debate. I say that because only a very small fraction of the population actually earns minimum wage—about 2 to 3 percent of the working population—and, yet, it seems to have gotten the attention of a lot of people. The dangers involved in that is that is that is that it’s misdirected with regard to, trying to assist and solve the problems than what many people regard as the problem to be solved. It would be far more effective to target your program to the one-third of those people who are actually in need of assistance. The minimum wage puts the burden on those companies who are paying the minimum wages, which tend to be fast food restaurants, and other services, those are the low-end and low skilled service jobs. What winds up happening is that if you push that minimum wage higher; you wind up hiring fewer workers.
If the price of something goes up, you will demand less of it, and that will include workers. So, as the wage of workers rises, employers will want to use fewer workers. That scenario creates additional amounts of unemployment. Even though, in fact, I care very deeply about the state of income-challenged people, and I want to give them as many opportunities, quite frankly, raising the minimum wage will actually—in my view—hurt them not help them as a group.
It is very complicated, as are many things in economics. Sometimes policy makers try to do things in a very simple way, which can wind up with unintended consequences that can make the situation worse.
Where do you see interest rates headed in the next 12-24 months? Bill: The only thing I can say with regard to interest rates is what the Fed is suggesting for interest rates. We just had the most recent Federal Open Market Committee (FOMC) meeting last week. One of the things that the Fed does—four times a year—is put together projections of where they see the economy, both in terms of the growth of GDP, the path of inflation, and with regards to the unemployment rate. In addition to that, they offer up where they think the Fedʼs main policy tool, which historically is the Federal Funds Rate, is going.
With regard to the Federal Funds Rate, it looks like through the end of this year virtually all policy makers see the policy as remaining roughly where it is right now—between zero and 25 basis points. Then for the end of next year, policy makers see it as about 1.25 percent higher, just below 3 percent by the end of 2016 and at 3.75 percent by the end of 2017.. Inflation is expected to edge higher; but the FOMC and, the policy makers see those inflation rates still remaining below 2 percent all the way through 2017, but approaching 2 percent by the end of 2017.
How do you see the risks to the U.S. outlook? Bill:I think most of the risk to the U.S. outlook is beyond the borders of the United States.
Whether it’s the slowing growth in China or what is going on in both the Ukraine and in the Middle East, I find it fascinating that when we have seen unrest, particularly in the Middle East, normally energy prices would start to move quite a bit higher. In this case, we have not seen that. In fact, energy prices, since all of this turmoil began, and, for most of this year, have actually moved lower oil had been over $100 a barrel, but now it is closer to $90 dollars a barrel.
A very sincere thank you to Bill Strauss, Senior Economist at the Federal Reserve of Chicago, for his time and outstanding insights.