Friday, November 16, 2007

Future May be Rosier Than We Thought

The 2008 Economic Outlook

Yesterday, I had the opportunity to attend a presentation by Dr. Ken Mayland, President of ClearView Economics, sponsored by Key Bank. While many in the mainstream media are suggesting a recession is coming, Dr. Mayland believes that our economy is resilient and that many of the trends he is watching suggest a gradual path to economic growth for 2008.

What does the economy have going for it? According to Dr. Mayland, manufacturing inventories are on the lean side. Capital spending on equipment is doing okay, but such spending on structures is even better. Balance sheets are strong with corporate profits expanding at a 28% annual rate in the second quarter. The Fed cut rates and may lower short-term interest rates more. Exports and public spending are also holding up well and inflation is a “tiny” problem which gives the Fed wiggle room.

Beyond these good trends, Dr. Mayland does advise people to prepare themselves for more bad news. He believes there will be more declines in housing starts, investments, prices and higher inventories of homes on the market. We may see a gradual rise of unemployment levels and tepid job increase. Because of supply and demand problems, we will also see energy rates remain high. As a result of many of these trends, we will see many more forecasts of a recession and more days of large fluctuations in stock prices.

The specific trends he believes promote a more optimistic outlook include: Deep cycle low points in housing starts tend to “bottom out” around 1 million units and we’re already at 1.2 million nationally “so much of the decline is behind us.” The ISM Purchasing Managers composite survey was at 52.9 in August and 52 in September. Any composite survey above 50 in this index generally suggests that manufacturing growth is taking place. He also notes that inventories are very lean and orders, production, exports and employment in the manufacturing sector are all seeing moderate growth.

From an employment perspective, an unemployment rate of 4.6% nationally suggests that we’re at near “full employment.” Every Thursday morning, he watches the Department of Labor to see the numbers of initial claims for unemployment. In October of 2007, this report indicated that there were 327,000 initial claims. When these numbers are below 350,000 that suggests the economy is sustaining employment and when they are over 400,000 there is reason for concern.

In other words, the good news may tend to outweigh the bad news but that doesn’t always get everyone’s attention. His presentation, however, certainly did get my attention and offers a far more optimistic outlook that I expected when driving with Ted Fowler, of Key Bank, to the breakfast program. Here’s hoping Dr. Maynard is right and special thanks to Key Bank for the invite.