BREMERTON — Economist John Mitchell is bullish on the local, state and national economy.
Mitchell said that the economy as of January 2016, was extraordinary and exciting, with unemployment at 5 percent and the inflation rate less than 1 percent.
“Not bad at all,” he said.
Mitchell spoke at the Kitsap Economic Development Alliance’s annual economic forecast meeting at the Kitsap Conference Center in Bremerton Jan. 28.
Mitchell said a crude way to estimate how long an expansion might last was based on the lag between the end of a recession (June 2009) and the first increase in prime interest rate (December 2015). By that measure, he said, the current economic expansion could last until 2021.
[LINK: KEDA’s 2016 Economic Forecast Presentations site ]
[LINK: Mitchell’s slide presentation (pdf) ]
Mitchell said a tighter labor market would put “more upward pressure on wages. Availability of skilled labor is going to be a big deal … Wage pressure for low skilled were almost as pervasive because of minimum wage increases and labor shortages at entry level positions.”
Mitchell said the Federal Reserve’s “Beige book” had a fairly cheery message.
“What’s it say? U.S. economy continuing to grow moderately, labor markets tightening, some signs of wage growth, housing doing real well. This is really good.”
Because so many economic indicators were positive, Mitchell said “the worst market opening ever” and pessimistic newspaper headlines in early 2016 were a bit baffling.
“There’s a real discordant message,” he said.
Mitchell said the recent market volatility reminded him of the 1987 market crash, which quickly recovered into a long bull market. He said he was doing a radio talk show during the 1987 crash and people were convinced it was 1929 all over again. Yet the economy kept growing for three and a half more years.
“I make that point that it doesn’t always follow that a sharp market decline is followed immediately by weakness.”
Commodities like oil, steel, grain and copper were very low. The U.S. has had six years of growth at 2 percent and Mitchell said it’s probably going to stay at that rate for years.
Mitchell said it is important to think about how economic expansions typically come to an end. The U.S. is now in its 80th month of economic expansion — longer than average.
“The average upturn in (the) post WWII time period has been like 58.4 months. This is a long expansion,” he said.
“Like beer bellies and bald spots, it is very difficult to be precise about the start of a recession until the evidence becomes overwhelming,” he said, quoting a Baron’s Magazine columnist.
• Slow growth due to lack of stimulus in response to recession
Mitchell was of the opinion that real GDP growth would be around 2 percent through 2017.
“That is not the kind of surge you’ve seen after other serious recessions, where in the immediate aftermath you would see much more rapid growth rates … it didn’t happen this time. You’ve got to ask yourself why? What’s going on here?”
Mitchell said the reason the economy was only growing at around 2 percent was due to a lack of strong fiscal stimulus spending to offset the effect of the Great Recession.
Mitchell said he was impressed with former Federal Reserve Chairman Ben Bernanke’s book, “The Courage to Act.”
“(Bernanke) talks about the fact that there wasn’t a lot of cooperation from fiscal policy makers dealing with the recession. The (Federal Reserve) was there basically having to do it on their own. You had the stimulus bill, but then that faded. And it got me thinking … a long time ago when I first started taking economics — back in the early Kennedy administration — it was very exciting to think about fiscal policy, activist fiscal policy.
“And one of the great questions was in the late 1930s when the economy was recovering from the great depression we tightened fiscal policy in the United States … it sent us back down into recession in the late 30s. I always thought, as a 19-year-old, ‘wow that’s really silly.’ What did we do after the great recession? We basically did the same thing: we tightened policy. It didn’t send us back into recession, but I think you can argue it’s one of the reasons you had the 2 percent growth.”
• Inflation low, but will rise
Durable items such as vehicles were decreasing in price. The price of services such as medical and legal services, and rent prices, were going up. Non-durables such as gasoline and food were going down in price. Inflation would probably increase to 2.3 percent by 2017.
The lower price of oil had both positive and negative effects on the economy. On the plus side, it allowed consumers to spend less on fuel and more on other items. Low oil prices also help airlines and chemical manufacturers. On the negative side, the decline in oil prices mean that domestic oil companies earn less money.
“We’ve had massive increases in oil production in the United States, so more of the impact of that decline in prices is domestic.”
That’s bad for North Dakota, Texas and Alaska, for example.
“They’re having a tough time … It’s rippling through the economy, helping some places hurting other places.”
“We’re setting the stage for the next jump in oil prices. Billions of dollars worth of (fossil fuel) projects have been cancelled, put on hold. (Oil) well count going down.”
The rising value of the dollar meant it was difficult for the U.S. to compete with imports, but “from a consumer standpoint it holds down prices.”
• Housing a source of strength
Building permits are now rebounding, and young adults will likely move out of apartments and into single-family homes.
The median family had 158 percent more income than necessary to buy a median house, Mitchell said. That is higher than it was in the 1980s, when the median family had around 130 percent. Thus housing affordability is high in a long-term sense. With employment growth, that suggests that housing is going to be a source of strength.
• Other indicators
45 states had job growth, with Washington the fourth best state, and Oregon fifth. North Dakota, with its heavy dependence on oil production, used to be No. 1, but now it’s in 50th place. Other energy producing states such as West Virginia, Wyoming, Louisiana and Alaska were also doing poorly in terms of job growth. Seattle’s job growth was 2.5 percent, and was one of the stronger metro areas in the country. Bremerton’s job growth was 4.9 percent. Washington’s population growth rate — 1.5 percent — was double the national average. Washington wages were above pre-recession levels. Washington was the sixth-largest growing area of domestic migration. Kitsap building permits were up 170 percent.
