Economist reviews progress of recoveryWritten by Duane Ramsey | | email@example.com
Ken Mayland, a leading economic forecaster, discussed the outlook for continued economic growth in his presentation, “The Outlook for 2011: Can a Recovery be Sustained,” at KeyBank’s economic update Oct. 26 at the Toledo Club.
“The economy wants to expand but something must be holding back the economy. Here’s what helped slow down the recovery,” Mayland said.
Mayland said lackluster consumer spending growth, lack of a housing rebound, big declines in nonresidential construction, loss of potential to foreign producers and reductions of state and local government spending are all factors that held back recovery of the economy.
Consumer spending has grown since 2009, but went down in May and June. It is still on a recovery track with growth in the past three months. Consumers are re-leveraging by paying down installment credit and overall debt, Mayland said.
Capital spending on nonresidential structures was down 25 percent then 20 percent and now 15 percent, so things are getting better. Capital spending on equipment and software is up 15.8 percent, while inventory is rebuilding by a modest growth of 1.8 percent.
Mayland examined the 12-month sales and inventory growth in the manufacturing sector.
When business sales growth is greater than inventory growth, that’s when the economy improves. That transition occurred in September and should continue through the end of 2010, he said.
State and local government spending is down 1.5 percent, a noteworthy decline, but “the revenues are starting to come back. Here in Ohio, we’re seeing increased revenues and they’re going to need to spend them,” Mayland said.
While exports grew by 14 percent, imports increased 17.2 percent in volume during the past year, which is lost potential of production for the economy here, he added.
“The resistance to economic growth has diminished with these factors. Some of the headwinds against the economy should diminish while others will turn into tailwinds,” Mayland said.
“We had GDP growth without job growth but it did not stop the economy from growing in the past year. If we continue to see incremental increases in the GDP, we’ll start to generate a significant number of jobs.
“Fiscal drag, especially the federal deficit and debt, will weigh heavily on economic growth. We’ll see a modest growth of 2.5 percent in 2011 with little progress in reducing the unemployment rate,” he said.
Potential federal tax increases loom with the sunset of the Bush tax cuts Dec. 31. The U.S.. could see a marginal increase in the tax rate from 35 to 39.6 percent, he said.
“This is a powerful force on the economy. Congress may decide to mitigate this tax impact, but this problem is not going away. You can’t tax your way out of this problem,” Mayland said.
The November elections are another answer to the headwinds against the economy with a potential change in power. Political reports predict a 90 percent chance for change of power in the House with only a 20 percent chance in the Senate, based on the number of seats available in each.
“Things that hurt the economy are starting to turn. Banking and manufacturing are rebounding, while exports and farming are doing well. Ohio is starting to see some job growth. We’ll get our share of recovery in Ohio.”
Since July, reports have shown an easing of underwriting standards in commercial bank lending practices. “I believe this is a sea change for the economy,” Mayland said.
“The worst is way behind us. Capital and earnings have returned for banks,” said James Hoffman, district president of KeyBank in Northwest Ohio and Southeast Michigan.
Hoffman reported that KeyCorp returned to profitability in the second quarter of 2010 and reported a profit of $178 million, or 19 cents a share in the third quarter.
He predicts banks will get back to lending money. Business loans won’t see growth until the economy recovers more, but interest rates are expected to remain low so consumer lending will continue to grow.
KeyBank is one of the leading lenders of small business loans, ranking as the 12th largest SBA lender in the U.S., according to Hoffman.
Mayland is president of his firm, Clear View Economics, which specializes in economic research and forecasting. He has spent 35 years studying the business cycle and providing economic analysis for a variety of clients, including KeyBank.