Recession not happening yet

Published 6:02 pm Friday, May 2, 2008

By By JOHN EBY / Dowagiac Daily News
What recession?
"It's very confusing for everybody. Nobody knows what's going on – expert or not. We won't know if we're in a recession until a year from now when it's already over," A.J. Daly of Metropolitan Life told Dowagiac Rotary Club Thursday noon at Elks Lodge 889 as the guest of Edward Jones financial adviser Phyllis Sarabyn. "By the time we figure it out, it will be too late. The economy will be going gangbusters, everyone will be selling their homes and everyone will have jobs again. That's essentially how it's always worked. We never know we're in a recession when we're in it."
"Everybody's watching Wall Street. Corporate earnings continue to set the mood for how the market performs. This week is a big week, 'earnings week.' Burger King, Met Life – the company I work for – Bank of America, pretty much every major corporation reporting earnings. That's why there's a lot of volatility," with the market shooting up or subsiding in tandem with performance.
"Financials – and Bank of America is one of those – continues to underperform," Daly said. "But the media doesn't like to tell you about the good stuff. The reality is Ford Motor Co. reported its first profitable quarter in I can't even remember. Technology is doing well. But the consensus from Wall Street is that lower earnings are in the future. We're not going to see a whole lot of growth in the economy. Corporate spending is flat. Housing is killing us. Sales were down 12 percent in February. In Michigan we have a 9 1/2-month inventory. What that means is that 9 1/2 months have to go by for us to sell the homes that are for sale right now. Five years ago you could have sold your house in a week and a half."
Daly noted that April 28 the much-heralded federal stimulus checks started to be mailed to boost the economy.
"The problem with that," Daly said, "is that we won't know for several quarters what the impact will be. It will be the third or fourth quarter before we hear about what's happening with these checks and where people spent their money. Doom-and-gloomers say vice is going to do well – gambling, cigarettes, alcohol."
As for the "recession," Daly reminded Rotarians that the economy grew at a rate of 0.6 percent in the first quarter of 2008.
Economic growth means the nation, as measured by gross domestic product (GDP), generated more value in the form of goods and services than it did during the last period measured.
News reports about the economy persuade you that if growth is slow, the economy is getting worse, but if there is any growth, the nation's output is improving.
When growth is negative, things are getting worse. That hasn't happened since early in President Bush's first term, and it hasn't happened at all since Bush's 2001 and 2003 tax cuts went into effect, so presumptive Republican nominee Sen. John McCain, who voted against them, conceded they worked and proposed to make them permanent.
"GDP is the key indicator of how the economy's doing," Daly said. "We did see some growth first quarter, but not a lot. To give you an idea, third quarter last year we saw 4.7 percent growth in the economy. It's slowing down. It's sluggish, like molasses, but the reality is that's still a good thing. Recession is two consecutive quarters of negative GDP growth. We haven't seen that. We continue to see positive growth. Two thirds of the economists in the world are going into their rooms trying to figure out where they went wrong because they were saying we were in a recession."
"The reality is, we're seeing a lot of key things that are doing well," Daly said. "Exports were up 5 percent first quarter, which leads us to believe our service-oriented economy is taking a step back to more of a manufacturing orientation, which is a great thing for Michigan, right? Michigan's almost all manufacturing jobs. We're seeing a shift maybe in the way our economy's working. Government spending is up 2 percent. Consumer spending was up 1 percent. There are good things happening, though we don't hear about them in USA Today or the Wall Street Journal. My opinion why is that it doesn't sell newspapers. If things are great, nobody seems to care about it."
But what about soaring gas and food prices robbing people of their disposable income? asked banker Doug Stickney.
"That's a key concern – energy prices – right now," Daly agreed. "But a lot of experts – the same ones who told us we're in a recession when we actually aren't – don't seem to think it's ethanol – making fuel out of corn – making grocery prices go up. They think it's the energy prices to move the groceries that's making them go higher. Here's the good news: Oil being more expensive is not necessarily a bad thing. I know it seems like it is because it comes out of our pockets, but it's going to force fuel competition and the way we think about energy. It's going to make other analogies less expensive than our current dependency, which is a great thing for the U.S. If we can figure out a sustainable energy source that we can do here in the United States to stop dependency on foreign oil, it will help our economy so much that it will be exponentially better than what we're working with today."
"Something you haven't mentioned is cutting interest rates, which raises the price of oil and is devastating to seniors who have savings and CDs (certificates of deposit)," stated Dr. Fred L. Mathews, chairman of the Southwestern Michigan College Board of Trustees. "Cutting interest rates to stimulate the economy is absolutely ludicrous. Industries expand when they're selling more goods."
Daly responded, "It's intended to make money easier to get and to grow the economy, but your point is correct. It also tends to weaken the dollar. That's something our next president is probably going to end up dealing with. It doesn't seem like our current president is going to tackle that."
"But when our government spends money it doesn't have, do you think that's good for the economy or bad?" followed up retired SMC president David Briegel.
"That's a loaded question," Daly treaded carefully. "The reality is that in the short term, it's a good thing, like what we're doing with this economic stimulus package. That's coming right out of the government's allocation for where it's going to spend its money this year, and it's going to be given back in hopes of a short-term spurt that moves the economy forward while the actual indicators that move the economy forward catch up. The reality is that corporate America is sitting on a ton of cash. Corporate makes a lot more profit margin on things that happen outside the United States than in it."
Touching on retirement, he said, "We learn our investment techniques from our parents, but it's not going to be your father's retirement. It's rapidly changing. I equate it to the tallest mountain in the world, Mount Everest, 29,000 feet that people are always trying to conquer by getting to the top and planting their flag that they made it. We're all trying to save and climb up that mountain. But what's happening is that retirement is no longer an event – it's not getting to the top of that mountain – but a process. You have to walk back down the other side of that mountain. Mount Everest, 90 percent of the casualties don't happen on the way up, while you're saving. They happen on the way back down. It's the same thing in retirement.
"Why does the game change so much when you get to the top of the mountain and start your descent? One, you're not making any income to correct any mistakes you made. Second, if you've been watching the news, is longevity – the risk of living long. The entire insurance business as it's known today was created because people weren't living long enough. Farmers were dying before their wives and children and had to have some way to provide for them. Life insurance was created out of necessity."
Last week USA Today reported on a 115-year-old Indiana woman, he said.
"Are you prepared to live to 115?" Daly said. "Inflation over a long period of time, such as 20, 30 or 40 years, I equate to stamps," which cost 17 cents in 1971 during the Vietnam war, compared to 2 1/2 times that amount today for the same service.
"You not only have to sustain an income from your savings that will last a lifetime," he said, "but you have to make that money grow by 2 1/2 times. That doesn't happen with a CD paying 2.5 percent and inflation averaging over 3. Longevity and inflation can only be counteracted by investing in equity – the stock market – which is a scary thing to me because there's a real risk of losing. The reality is you have to be there because the bigger risk is running out of money because longevity or losing your purchasing power because of inflation."
Daly said he met with a Social Security Administration representative Tuesday night. "The max payout if you wait until your full retirement age is $32,000. The average is $20,000 per family. I found that unbelievable considering the way we live. Most of us can't survive on $32,000 a year. On needs-based analysis, only 43 percent of what retirees need comes from Social Security. The rest of that has to be made up from your own savings. My dad thinks Social Security is going to cover everything he needs. You'd think that with what his son does for a living, he'd know better than to not plan for it, but he's not going to listen to me, a punk kid. Social Security is the bottom building block" under IRAs, pensions and savings. Living another 20 to 30 years, the last thing you want is to be in a position where you can't take care of yourself."