Economist Hale predicts soft landing for U.S. economy
After more than two years of prosperity, 2007 could be the next period of risk for the U.S. transportation industry, economist David Hale said.
Next year could witness a correction in the overheated housing market which would increase personal savings and decrease consumption, and in turn slow growth of the whole economy, Hale said.
Speaking Monday at a conference on freight productivity hosted by the Georgia Tech Logistics Institute and motor carrier Schneider National, Hale predicted economic growth would stay on course through the first half of 2006 and slow down to 2.5 percent in the second half of the year after a prosperous period of more than 4 percent growth.
Hale, a former chief global economist for Zurich Financial Services who now runs his own financial consulting firm in Chicago, explained that the dip in the economy would not be a disaster because inflation seems to be gradually heading to a manageable rate of 2.5 to 3 percent and that Federal Reserve Chairman Alan Greenspan will continue to make interest rate policy based on the core inflation rate, excluding oil and food.
The Fed will continue to raise the federal funds rate, which influences commercial interest rates, because it wants overall growth in the economy to be around 3 percent, not 4 or 5 percent, Hale said.
However, increased risk for higher interest rates could come from the current account deficit the United States has with overseas traders and investors. Hale said a drop in the current account deficit could help to pump up U.S. exports, but if the U.S. dollar devalues too rapidly against Asian currencies it could cause a spike in interest rates.
“I see the current account deficit as an opportunity, a chance for a huge increase in U.S. exports and the possibility for a surge in U.S. manufacturing output, but if there is a hard landing of the dollar because of the (budget) deficit, that can also set the stage for higher interest rates, which could mean more pressure on the housing sector and more pressure on domestic consumption,” he said.
As U.S. consumption cools off, demand for imports is likely to decline, leaving more money at home to invest in manufacturing.
China’s recent decision to allow its currency, the yuan, to appreciate could be the first step toward a meaningful change in Asian currencies in the next two to three years, Hale said.
The United States needs to increase exports to bring down the current account deficit, $800 billion of which is from an imbalance in trade, Hale said.
“If we cut the current account deficit by 25 percent, manufacturing utilization will go from 80 percent to 87 percent,” he said. Cutting the deficit in half would take factory utilization to 94 percent and if there is equilibrium in monetary flows, utilization would reach 105 percent.
“The bottom line is, as we improve this current account we have to get a major improvement in U.S. manufacturing capacity,” Hale said.
As for the world economy, Hale said China’s policy is to bring its growth rate down to 8 percent from 10 percent because it is worried about speculation on large projects. Any possibility of a slowdown in the Chinese economy could affect commodity markets because China has been such a huge consumer of raw materials in the last few years. Developing countries in Africa and South America have greatly benefited from China’s demand for their raw materials, which has helped many of their economies grow at about 5 percent.
The lackluster European economy could get a bounce from upcoming elections in Germany and France. Christian Democrats in Germany and likeminded reformers in France appear to be leading in their campaigns and could usher in deregulation policies that free economic activity.