Economy Is Nation’s Chief Problem, Citibank Official Says
The American economy, inflation and monetary policy were covered at April’s Long Island City Business Development Corporation business breakfast by Peter D’Antonio, director of U.S. economic research at Citibank. D’Antonio said the economic situation is “getting better”, but added that recovery from the 2008 collapse has not been great nor is it likely to transcend its current modest pace. At the same time, he does not fear a fallback. He deliberately avoided making his address a straight lecture followed by a question or two. Instead, he encouraged interchanges and answered questions early, even as he prepared his next graphic for viewing. His cautious optimism was tempered by a strong belief that the deficit situation is every bit as critical as the deficit hawks say it is.
D’Antonio said that recoveries from past recessions have tended to generate growth cycles of about seven percent. This one, he was sure, could be expected to recover at no better than three percent. In light of such an unspectacular recovery, the rise in profits has been at least slightly surprising. Another thing to be expected is an interest rate increase by the Federal Reserve Bank next year. Current dollar spending, according to what has happened in the first quarter of 2011, could be projected to increase six percent for the year. Spending has been on discretionary items, which indicates a rising feeling of confidence, but it has been at a lower rate than normal in relation to income growth. Savings, never a great American pursuit, have been growing.
D’Antonio said small business has had difficulty finding financing, yet has increased hiring, “becoming a driver on the payroll side”. A payroll increase makes the recovery sustainable, since it is bound to grow “if a broad swath of the economy is hiring”, he added. Short-term unemployment stands at around five percent, which would normally be celebrated, but the much higher rate of long-term unemployment dampens enthusiasm. Unemployment insurance has been extended to uncommon lengths, which moved him to refer to a study of the old 26-week cycle of insurance payments. It showed that persons in the system were best able to return to work at two points: early, after only about four weeks of payments, and late, as week 26 and termination of payments arrived. One man asked when the “trillions” of dollars being held on the sidelines by banks and corporations will return to the market. D’Antonio said business and finance have a fear of inflation if funds come back too fast. Banks, for their part, accumulated mountainous reserves of money in 2009 as a bulwark against the decline going on around them. He said that the Federal Reserve Bank’s policy at that time fended off a true depression. A woman asked about the viability of credit card loans, which have gone from 20 percent to 60 percent of all loans despite punishing interest rates. He replied by referring to the availability of credit: the old fashioned kind, mainly bank loans, and the newer kind, the credit cards nearly everyone has. If the older means is closed, as it so often is these days, the newer, whatever its drawbacks, is an inevitable alternative.
Another man asked if the 2008 disaster could happen again. D’Antonio said that regulators are “more on top of” the situation than they were then. He also said he knows there are future challenges we cannot recognize at present, but he believes we will be better prepared for them. A skeptic in the audience said that corporate profits might be gaining, but will they be invested? Why, in other words, the questioner wanted to know, should we be happy about corporate prosperity? D’Antonio again emphasized that the recovery is now sustainable. The jobs that have been cut should lead to a greater job demand eventually.
The rise in oil prices may affect monetary policy, D’Antonio said. He estimated that every penny increase in the energy price amounts to $1 billion cut in consumer spending ability; meaning that there has been a $60 billion decrease since last summer. The price increases for oil “are like a tax”, he said, but they have not caused other prices to rise. He observed that in the past 15 years the price rises that have occurred have failed to have a growth effect on the rate of inflation. He showed a graph of the 1995-2010 period during which prices rose considerably but inflation mainly flatlined.
Recent Washington skirmishes such as the shutdown threat have not impressed D’Antonio, but the economic hazards politicians must deal with are real and grave, he said. For one thing, he noted, we have to raise the debt ceiling, owing to past decisions we have made, not present or future ones. Ours is a reserve currency, he added, and failing to maintain it would be a disaster. The debt ceiling squabble in Congress must not be allowed to carry on past this summer. He called the deficit large and expanding after a decade, and showed graphs that indicate it cannot be resolved the way it might have been in the past. Entitlement spending is such that no amount of taxation could put it under control.
At a recent Washington, D.C. economic meeting, D’Antonio said he heard a lot of talk about a “two-year situation” that would bring the country to a near-breakdown. We might have to have a severe crisis to force both necessary cutting and taxation, he said, concluding that in the next presidential term, President Barak Obama or a successor must recognize that the economic situation is the nation’s chief problem.