In Chicago, Economic Outlook sees US momentum

Published on January 20, 2015

The United States continues a sixth year of expansion, but weak economies in Europe and Japan present a drag on global growth, economists agreed at the Chicago Booth Economic Outlook 2015.

Randall S. Kroszner, Norman R. Bobins Professor of Economics; Austan D. Goolsbee, Robert P. Gwinn Professor of Economics; and Carl R. Tannenbaum, AB ’81, MBA ’84, senior vice president and chief economist at Northern Trust Corp.; offered their forecasts at the annual event, which drew more than 900 alumni and business people to the Sheraton Chicago Hotel and Towers on January 15.

With US economic growth in the 3 percent range, the unemployment rate at 5.6 percent, and average monthly job growth of around 250,000, it might seem surprising that there is so little upward pressure on wages, Kroszner noted.

That’s because the traditional unemployment rate doesn’t account for those who have given up looking for work but still want a job and those who are working part time, but would prefer full-time employment, said Kroszner, a former Federal Reserve governor. “Include those people and you get an 11.2 percent unemployment rate. This provides a different perspective on the state of the labor market, wage pressures, and Federal Reserve policy,” Kroszner added.

THREAT OF DEFLATION

A particular concern is the threat of deflation around the world, particularly in Europe. Decreases in the prices of goods and services are difficult to stem, because once buyers expect lower prices, they wait to buy, which leads to lower demand and lower prices. Additionally, when the price of a good or service falls due to deflation, producers earn fewer dollars than they had expected and may not be able to cover repayments on their debt. This causes bankruptcies and layoffs, further lowering demand in a dangerous debt-deflation spiral. A deflationary cycle abroad could have repercussions for the United States, Kroszner warned.

Goolsbee, too, expressed concern over the stagnating economies of the eurozone and noted that the European Central Bank is embracing quantitative easing, the policy of buying government bonds that helped revitalize the US economy.

“Central bankers will have to decide: Either they will continue to subsidize months at a time to fix successive financial crises in a different countries, or they can withhold support until countries begin to leave the eurozone,” Goolsbee said.

On the domestic front, Goolsbee forecast some improvement in unemployment and modest growth in wages. “We should expect more of the same as happened last year, but a bit faster. It will be a decent year, not a great year,” he predicted.

Goolsbee, who served as chairman of the Council of Economic Advisers during President Obama’s first term, predicted that there would be no meaningful congressional action in the two years leading up to the 2016 presidential election.

“Nothing,” Goolsbee said flatly. “I predicted that nothing would happen during the last two years, and nothing did.” Because we are at the end of the president’s term, there will be show votes made by both parties, which will amount to nothing. And while debate is “coming to a head in immigration and corporate taxes, still, nothing will happen.”

OUTLOOK IN EUROPE AND JAPAN

Tannenbaum noted that deflation was looming in Europe and Japan, “even before energy prices were cut in half.” The plunge in energy prices will cause pain for energy producers such as Russia, Venezuela, Brazil, Nigeria, and Iran.

The lingering malaise in the eurozone has fueled the rise of populist parties that are anti-market, anti-EU, and anti-immigrant, he observed. The seats won in the European Parliament last spring could be a harbinger of gains in upcoming national elections, which would greatly complicate the challenge of restoring respectable economic activity to the continent.

Japan’s reform program seems to have stalled and the economy has re-entered recession. Social reforms aimed at improving incomes and reinforcing the labor markets haven’t advanced, Tannenbaum added.

On the bright side, the United States is in the midst of the strongest portion of its six-year expansion, he said. The United Kingdom also is powering the global train, closing 2014 with 2.6 percent growth. China also deserves a place toward the front, although its economy may be losing some steam. Growth continues to moderate; next year’s target may not be much more than 7 percent, down from nearly 12 percent only a few years ago, he said.

“So the speculation as we enter the year centers on whether the power from the world’s economic engines will be sufficient to bring all of the cars up to speed,” Tannenbaum concluded, “or whether the weight of the freight will pull the leaders back to the pack.”—Robin Mordfin