Good economic news expected to last awhile

The U.S. economic numbers should continue to improve this year as the administration works to have positive economic results in time for the presidential election in November, according to economist Don Reynolds. Reynolds spoke on Are Happy Days Here Again? at the NAPSLO Mid-Year Workshop. 

"One thing about this president is that he is incredibly good at looking at past mistakes," said Reynolds, who was appointed as chairman of the Texas Board of Pensions by then Gov. George W. Bush. Reynolds now runs 21st Century Forecasting. "One of the big things he thinks about is what didn't work for his dad. What did not work for his dad when he was running for re-election was that he did not have good economic numbers come time for November. A lot of people argue that is the reason Clinton won, the economy was not doing well. So he is determined to make sure that this economy is strong and have fabulous, strong economic numbers going into a presidential election season.  He's going to get them."

However, while the country will see good numbers, or what he called the "Perfect Party," Reynolds said there are a number of areas of concern. Current interest rates are at historic lows, the government is running massive deficits and additional components of the largest ever tax cuts are being phased in, leading to potential problems.

"We're going to have in 2004 what I think is a Perfect Party," Reynolds said. "The question, the reservation I have, and I'm not there yet, is the Perfect Party going to be followed by a 'Perfect Storm'?"

Reynolds said recent positive economic news included economic growth reported at 8.2% for the third quarter and approximately 5% for 2003. In addition, productivity, personal income and consumer spending are also up.

Reynolds credited much of the recent good economic news to continued spending by consumers. But he also pointed out that consumer indebtedness had risen from 60% of annual income in 1960, to 90% in 1998 and currently is at 108%, in part due to refinancing and purchases based on low adjustable rate mortgages that expire after three to five years. With 10-year Treasury notes potentially increasing from 4% to 6%, consumers might see a 30% increase in their payments when they have to refinance in a few years.

"How many people can handle a 30% increase in their house payment," he said. "What fueled this is everyone refinanced their house and they locked in low interest rates. The problem is that 48% of people move within five years." 

The U.S. government is also running large deficits and those deficits are currently being funded through purchases of Treasury bonds, the Bank of Japan, the Bank of China and hedge funds. While rates are at historic lows, they aren't expected to remain there.

"(Federal Reserve Chairman) Alan Greenspan knows he's got to raise interest rates but he also knows you don't raise interest rates during a presidential election," Reynolds said. "I think we're going to wake up one day and very fast, probably after the presidential election, see a very large upward movement in interest rates."

Regarding the stock market, Reynolds predicted that the current situation might be comparable to the 1966-82 period when the Dow Jones Industrial Average swung up and down between 700 and 1,000. In the future we may see several swings between 7,000 and 11,000, he said.