Economist sees interest rates rising in June


Most executives in West Michigan business would probably agree the state and national economies have definitely come back to life, but it is already a mid-cycle economy in the U.S. now, according to Comerica Bank’s chief economist Robert A. Dye.

Going into 2015, he predicts a continuing decline in unemployment and the likelihood of a June rise in interest rates.

“I no longer call it recovering,” said Dye, referring to the U.S. economy, noting it has now been growing for six straight years.

Dye, a senior vice president at Comerica, and Dennis A. Johnson, also a Comerica senior vice president and its chief investment officer, presented the Economic and Investment Outlook at the Pinnacle Center in Hudsonville last week, heavily attended by key representatives of the West Michigan business community.

Dye noted the economy in the first quarter of 2014 was “challenged” by the severe winter weather, causing the GDP to contract, but the later quarters came back “very strong,” with the average rate of growth in GDP running from 3 percent to 5 percent. Unemployment at the end of 2014 was 5.6 percent, “getting back into the normal range.”

He predicts there will be “about 3 percent GDP growth for 2015.”

In Michigan, the current unemployment rate is still above the U.S. average, “but the good news is they are both going down,” said Dye. He expects “moderate growth” in Michigan employment in 2015, with manufacturers now “feeling a little more confident,” perhaps due in part to the emergence of Detroit from its bankruptcy.

Dye touched on the resurgence of the auto industry in the U.S., and predicted that auto sales by the end of 2015 will range from 17 million to 17.5 million.

“This is a number that is starting to plateau,” he said, explaining that auto sales “are not going to get that much better” as an important factor among drivers of the U.S. economy.

The office furniture manufacturers based in West Michigan are “starting to feel a little more demand,” and the 2015 economy might see a “tight labor market” by the end of the year, with unemployment at or below 5 percent.

There is a shift underway in regional economic growth patterns, according to Dye. The oil producing states — Texas, the northern mountain states and the Dakotas — have seen high growth but are “starting to feel downdrafts.”

In 2014, one of seven new jobs in the U.S. were in Texas, but “we won’t see that happen this year.” Dye said, in fact, that the low price of oil is now leading to shutdown of some oil rigs in the U.S.

The worldwide low price of oil has put more money in Americans’ pockets, said Dye, with every penny decline in gasoline price estimated by some economists to put about $1 billion into the U.S. economy. But he predicts that consumption of oil on the world market is not going to go back up because of technological efficiencies now in place.

The price of a barrel of crude oil could possibly drop further yet, into the $35 dollar range, which would be a “bounce from the bottom.” He predicts that oil prices ahead will be a “rollercoaster ride.”

Falling oil prices are proving disastrous to the Russian economy, which causes shock waves through much of the global economy. Dye said there is the “possibility of Russian default” on its bonds, “but that remains to be seen.”

China’s GDP growth — at 6.5 percent to 7 percent — is “significantly cooler” than the double-digit growth it had been enjoying for years.

Europe, meanwhile, with an economy much larger than that of the U.S., is “still stumbling along, still underperforming,” and may even be heading “back into a triple-dip recession,” according to Dye.

On the home front in the U.S. economy, new home construction is not an accelerator in the economic expansion. Home construction is coming back, according to Dye, but not like it was in the past. Even though the annual rate is 1 million new homes, there is still “a very, very tight” housing market in the U.S., and part of it may be attributable to “the mountain of paperwork” now required of home buyers by federal credit standards.

Falling oil prices could complicate the picture for the Federal Reserve System, which favors price stability, but “a lot of volatility” may be ahead.

In late October, the Federal Reserve announced it no longer intends to continue “quantitative easing” — purchasing of government and mortgage bonds — to help revive the U.S. economy. Since it started in 2008, the Fed has acquired $4.5 trillion in bonds, according to the New York Times.

“The next step,” said Dye, is for the Fed “to bring the interest rate off the floor.”

Janet Yellen, chair of the board of governors of the Federal Reserve System, has said that release of the interest rate won’t start before April but will start before the end of 2015.

Dye said he guesses it will begin in June, but he also guesses that after several years of unusually low interest rates, the U.S. isn’t used to higher rates, and so whatever the Fed does will have a “shallow trajectory.”

Johnson began his presentation with tips for investors in 2015, which included: don’t try to time the market when planning to make an investment. And he returned several times to his view that investing in general in 2015 is going to be more volatile.

Stocks, he said, “will continue to perform very well,” and continue to outperform bonds and cash.

The frequency of volatile changes in the market will go up in 2015, predicted Johnson, so he urges investors to “lower your return expectations.”

The annualized return on bonds over the last three years has been about 2.5 percent. That may drop to 1.8 percent in 2015, as interest rates finally start to rise, so investors who are still interested in bonds will need to be willing to take on “a little more risk” and everyone needs to “think differently about bonds,” said Johnson.

Over the years, investors “ran away” from municipal bonds due to defaults of major American cities, including Detroit, but Johnson pointed out that the real default rate is under 1 percent or 2 percent.

“If you need to be in bonds, the place to start is in the municipal bond market,” said Johnson, with its attractive tax advantages and security.

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