A one, two, three economy


Mitch Stapley and John Augustine of Fifth Third Bank see the national economy “finally gathering strength,” and say the country may enjoy a “one, two, three economy” over the next couple of years — if there aren’t too many headwinds whipped up by the federal government.

Stapley, chief investment officer at the bank, and Augustine, chief market strategist of Fifth Third Asset Management, shared their economic predictions for 2014 at a private business luncheon last week. The two are often interviewed and quoted by news organizations such as Bloomberg, CNBC, The Wall Street Journal and The New York Times, and they shared their thoughts with the Business Journal prior to their luncheon presentation at Meijer Gardens & Sculpture Park.

“A one, two, three economy would be a very good thing, we believe,” said Augustine.

He was summarizing Stapley’s view that after the last four years or so, business is finally starting to invest again in people and machinery.

“We think that helps push growth, which this year has been about 1.7 percent, to something over 2 percent next year, and hopefully carries on to 3 percent in 2015,” said Stapley.

“Consumer spending, we think, is going to pick up,” he said, aided by interest rates that are not going up a whole lot, and inflation that seems to be contained, with gasoline prices one good sign of that.

Augustine said it appears the American consumer may be spending more next year because many have made a big dent in paying down the crippling debt they were stuck with as a result of the recession.

“That’s one of the reasons we’re seeing auto sales do better,” added Stapley. “Consumers have paid down debt, refinanced their mortgage (and) are able to take on more debt.”

Stapley added, however, that the average age of cars on the road in the U.S. — about 11 years — is obviously another major factor driving high auto sales.

“You may not want to buy a car in 2014, but you just might have to,” he said.

What happens in Washington is the wild card when trying to make economic predictions.

“The real unknown is the implementation of the Affordable Care Act,” said Augustine. “It’s difficult to handicap how much that may slow down the economy initially, in the first of the year.”

He termed it “a huge national experiment” and something new to the economy, of a size that many experts think may have some tendency to slow the economy somewhat. But how much and how long? “We just don’t know,” said Augustine.

Potential slowdowns could come from some sectors of the economy and from government-generated “headwinds,” according to Stapley, such as the budget cuts and the 16-day government shutdown in October. However, he said he believes those government issues are probably going to diminish in 2014.

Stapley was asked if the stock market is again overheated like it was several years ago before the Great Recession.

“We would say it’s had a great run,” he said, but pointed out that an important measurement of the market’s health is the price-to-earnings ratio.

“It’s now a little over 16, and that is basically right on the long-term average for the stock market,” he said.

“We would say that the market is fairly priced — maybe a little rich in some sectors,” he said. An example, he added, might be some of the Internet retailer stock that looks a little overheated.

“But in general, the market looks OK to us,” said Stapley. “Could we have a 5 or 10 percent correction? Absolutely.” But he added that something like the 30 percent correction in 2008 is “not in the data we look at.”

If one had to worry about something, said Stapley, “we’d say pay attention to the bond market.”

With a massive decline in interest rates over the last 30 years, the Federal Reserve is now saying that when the economy is heated up enough, it will begin ending its “quantitative easing” of interest rates.

“Which is probably the first quarter of 2014,” said Stapley, meaning the Fed will stop buying as many treasury securities and mortgage-backed securities.

Over the last couple of years, according to Stapley, the Federal Reserve has bought more than 70 percent of all treasuries issued and is still buying more than 95 percent of all new securitized mortgages.

He predicted an end to that will drive interest rates higher, noting that some already are moving up. The yield on 10-year treasury notes went from a low of 1.6 percent to about 2.7 percent “and we think they may go to somewhere around 3.25 (percent) next year.”

A rise in interest rates will depress the bond market and “investors need to prepare for that,” he said.

In summary, Stapley said he is “cautiously optimistic, but I’ve been pessimistic for so long it feels good to be optimistic, any way you can get there.” He cited the “tremendous pent-up demand on the part of consumers,” while their loan balance sheets “are in better shape than they have been.” And businesses, too, he said, have “more cash today than they’ve ever had on their balance sheets, so there’s a lot of dry powder out there — to hire more people, to build a new plant, buy equipment.”

Augustine said 2013 was “a year of persistent macro-calm,” with nothing really spinning out of control or going “tremendously wrong from an economy/market perspective. As long as the three main (government) policies — fiscal, monetary and health care — do not become terrible headwinds, the economy moves forward.”

Both agree that the headlines about the political discord in Washington — even the fear of a government shutdown — do not seem to get business upset enough to lay off workers, although business does hesitate at those times to increase investment in new facilities and new employees.

Augustine said the business community has been watching the situation in Washington for three and a half years now, and the markets are operating under the premise that “eventually, the right decisions will be made to allow the country and the economy to move forward.”

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