With the U.S. economy in its third-longest expansion since 1854, a Comerica Bank economist said continued moderate growth hinges on factors that can cut both ways.
Robert Dye, chief economist at Comerica Bank, said during a presentation to investors last month at Sunnybrook Country Club in Grandville that it’s possible the economic expansion can keep going past its current 100-month mark.
But it would hinge on factors, such as continued business investment, consumer confidence and low energy prices, he said — all of which will be affected by the Trump administration’s actions on tax reform, deregulation and infrastructure investments.
“We have a lot of expectations about tax reform, infrastructure and health care,” Dye said. “If we don’t get those by the middle of next year, there might be a post-bump slump.”
Dye said the current economic picture includes synchronized global expansion on a weaker U.S. dollar, business and consumer confidence, a manufacturing renaissance, low energy prices and low interest rates.
Potential “trip wires” for a slump could include a higher-than-expected increase in inflation, housing stalls, consumer spending slowdowns and a stock market correction.
“Nearly all recessions start with stock market corrections,” he said. “We just need three to four of those trip wires.”
Peter Sorrentino, chief investment officer for Comerica, also spoke at the investors meeting, and he agreed with Dye’s assessment.
“Strategists like to joke that the stock market predicted 10 of the last three recessions,” he said.
Sorrentino said although the U.S. stock market currently is a fairly homogeneous, low-volatility climate, he said one of the criticisms is risks might be building right now and no one is paying attention.
“We’re always looking at what’s the threat,” he said. “When you see an extended rally, you look at what could go wrong.”
In 2015, corporate profits leveled off and earnings declined, but stock prices remained steady.
“That raises a red flag,” he said.
Although The Federal Reserve decided on Nov. 1 not to raise interest rates the projected quarter point many economists had projected, one of the trip wires that still will affect millennials’ buying power besides a borrowing squeeze is wage pressure coming from low unemployment and baby boomer retirements.
“With low unemployment, if you want to hire for a skilled position, there’s not a lot of bodies; you’ve got to bid them away from their current job, which leads to wage pressure,” Dye said.
Typically, when the unemployment rate goes low, the rate of change in wages goes up. But “demographics are keeping that number suppressed,” he said.
For example, a baby boomer making $100,000 per year might retire. Then a millennial might be promoted to fill the vacancy, but they might only see a salary bump from their current salary of $50,000 a year up to $75,000 a year because of wage pressure and a skills gap.
This, in turn, affects buying power, which affects overall consumer spending — one of the trip wires Dye cited for a market slump.
He said Comerica economists will be watching to see what The Fed does to keep the economy from heating up and inflation rising, triggering a spending slump.
“It’s all about inflation now,” Dye said.