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Sunday, 25 October 2015 22:00

Q&A: Rick Mattoon, senior economist and economic adviser, Federal Reserve Bank of Chicago

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Despite growth in the U.S. economy, both long-term and short-term macro issues remain. That’s according to Rick Mattoon, a senior economist and economic adviser at the Federal Reserve Bank of Chicago. Years into the recovery, a number of key economic indicators aren’t as strong as they were coming out of past recessions, Mattoon said. While many economists predicted the United States could experience 3 percent growth in 2015, the country is on track for only about 2.2 percent to 2.4 percent GDP growth because of a variety of factors, he said. After speaking at an event sponsored by the West Michigan chapter of the Turnaround Managers Association, Mattoon shared with MiBiz his take on the state of the U.S. and regional economies.

What issues contribute to sluggish national economic growth?

The short-term stuff tended to show up in the first quarter. That tended to be things related to another bad winter. We had the West Coast port strike, which disrupted supply chains, and then the other interesting thing was the decline in oil prices. A lot of manufacturing activity was related to supporting drilling activities in various shale basins. What we ended up with was essentially when that started to fall off, all of a sudden all the guys who supplied pipes and services had a pretty rapid decline. So that took some growth out.

What’s the longer-term challenge?

The very strong dollar. As the dollar has strengthened considerably over this year, manufacturing led exports, which had been one of the real sources of growth, and that really started to be challenged. You’ve seen most companies sort of marking down their forecasts, particularly large, heavy machinery companies like Caterpillar or John Deere. They’ve been shown to have significant headwinds from the high dollar values.

What do you project for economic growth in 2016?

Probably in the 2- to 2.5-percent range. The biggest problem is you have to come up with a story that says where is demand really going to come from. When you look at the world economy right now, you have Asia which is pretty much slowing down — particularly, China is leading that. You have Europe where you still aren’t really seeing any significant growth; it’s essentially flat at this point. So it’s hard to come up with a story other than in the U.S. domestic market where you have a lot of growth and demand. It’s going to be hard to get a lot of top-line growth for companies. Therefore, it’s going to be a real restraint as to where the economy is headed.

How do you think business owners view the situation compared to your view from a macroeconomic perspective?

I think things aren’t as good as they were historically. If you look at the path out of this recession, it’s been a protracted period of very muted growth where in previous deep recessions, you usually have a very sharp snapback. (Normally), it’s almost like companies can’t catch their breath with the work. The expansion is very rapid. So right now, like in manufacturing, capacity utilization is still a little bit under 80 percent. They’re not really running flat-out right now, even if they’re seeing good order growth. They’re really able to manage pretty much whatever demand they are seeing within the existing production framework. They can be doing well, but it’s probably not as well as you might expect for this part of a recovery.

Is it time to raise interest rates from their historic lows?

They’ve tried to be pretty clear that they want to make a decision to raise interest rates to be data-driven. There’s really two components to that. One is: Has the labor market fully healed? While the unemployment rate has declined a great deal, there’s still lots of problems in the labor market. Lots of people are working part-time who would like to work full-time. The quality of some of the jobs being created isn’t all that high. There’s a sense that underlying conditions to the labor market could still have a little way to go before you get to that situation. The other aspect is we have to see more inflation in the economy.

The historically low interest rates have certainly benefited the commercial real estate sector. Do you have any concerns of a new bubble forming?

It doesn’t seem like it. If you look at the path, even with new construction put in place, it’s actually been fairly muted. A lot of what happened with low interest rates is people just refinanced existing debt. One of the things we’re concerned with is actually public construction, which has actually lagged in this period of time. One of the arguments has been that this has been the best time possible to take on debt to finance long-term assets, yet state and local governments have been very hesitant to invest in infrastructure.

As we head into an election year, what should business owners be looking for from an economic perspective?

One thing you’d like to see is a clear plan for fiscal policy. The clear plan would be how do you deal with both the relationship of taxes to what government is spending. We still have these two twin deficits that drive the fiscal situation in both health care and social security. What you have to do is come up with some sort of a concrete plan where you’re going to say how you will address those things. You’ll either fully fund them or somehow reduce the availability of them to certain populations, or you’re going restructure them entirely. Short of that, it’s difficult to bring the U.S. deficit into a reasonable range.

Interview conducted and condensed by Nick Manes.  Courtesy photo.

Read 1911 times Last modified on Monday, 26 October 2015 16:31

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