‘Broadening’ Economy on Track for Longest Expansion Cycle in U.S. History, Says Wells Fargo’s Mark Vitner
CHARLOTTE, N.C. — It’s been nine years since the Great Recession ended, and if the economy can make it to June 2019 without suffering a relapse, it will be the longest business cycle in U.S. history. Mark Vitner, managing director and senior economist of Wells Fargo Securities, believes that will happen because of how broad-based the recovery has been.
“For the most part, over the last nine months to a year all 50 states have been growing, which is something that hasn’t happened before,” says Vitner, who is based in Wells Fargo’s Charlotte office. “Typically, when the economy broadens it makes for a more durable expansion. When the strength of the economy begins to narrow, with fewer industries and states expanding, that’s usually a sign that a recession is a year to 18 months ahead.”
Vitner’s commentary came during his keynote address at the ninth annual Carolinas InterFace conference. The half-day event, which took place on Thursday, May 31 at the Hilton Charlotte City Center hotel in Uptown Charlotte, drew 212 attendees from across the commercial real estate industry in North and South Carolina.
The veteran economist says that the United States is currently at full employment with a majority of industries (64 percent) adding jobs. In the past 12 months, gains in nonfarm payroll employment have averaged 191,000 per month, and in May the unemployment rate reached an 18-year low of 3.8 percent.
With both job growth and export activity healthy so far this year, Vitner predicts the gross domestic product to grow by 3.3 percent in the second quarter.
“And we’re expecting the economy to grow 3 percent for the rest of this year,” says Vitner.
Tax Reform’s Positive Effects
Vitner believes that the Tax Cuts and Jobs Act will prove to be a major catalyst for economic growth. The economist says that the law’s most powerful attribute is the “substitution effect” it creates across multiple facets of the economy. For one, Vitner says tax reform should encourage hiring and retention, which would boost the labor force participation rate. The rate was 62.7 percent in May, compared with 66.1 percent in May 2008.
“One of the things that has been holding back the economy is the labor force participation rates have been really low,” says Vitner. “By lowering marginal tax rates, hopefully we’ll be able to pull more people into the workforce and also hold on to older workers who are retiring. They see that they get to keep more of their paycheck so they’ll stick around longer.”
Another substitution effect created by tax reform is capital expenditures for labor as companies are reinvesting in their operations, which Vitner says should boost productivity.
“Coming out of the Great Recession companies were hiring temporary and contract workers instead of hiring full-time staff. You don’t spend a lot of money training contract or temporary workers, so productivity growth languished to 0.8 percent a year,” says Vitner.
An increase in worker productivity would clear the runway for even greater gains in wages. Vitner says the hope will be for productivity to reach 2.5 percent in the next couple years so that wages can stay ahead of inflation.
“Wages can only grow as fast as productivity,” says Vitner. “If a company increases the pay of its workers faster than their productivity grows, it’s a mathematical certainty that that company will go out of business.”
Interest Rates on the Rise
During Vitner’s keynote address, the economist predicted that the Federal Open Markets Committee (FOMC) will raise the federal funds rate three more times this year — at its meetings in June, September and December.
“The Fed would like to normalize interest rates,” says Vitner.
If the FOMC decides to raise the rate by a quarter percentage point at that clip, the federal funds rate would be 2.5 percent by year’s end. Beyond having a widespread effect on borrowing activity, raising interest rates may push the economy into the dreaded inverted yield curve territory, economists fear.
An inverted yield curve is the point at which the 10-year Treasury yield is lower than the federal funds rate. (As of Friday, June 1, the 10-year Treasury yield was hovering at 2.89 percent.)
According to Investopedia, an inverted yield curve has preceded every U.S. recession since 1956 and is thought to signal to market participants that the long-term outlook for the economy is poor and that yields offered by long-term fixed income will continue to fall.
“If an inverted yield curve happens, a recession is a year away,” says Vitner. “I don’t expect that to happen until late 2019 or 2020.”
— John Nelson