19 Mar Experts foresee interest rate rise
March 18–Experts from Bank of the West predict another year of sluggish economic growth and warn that derivatives markets are starting to signal an increase in long-term interest rates is coming.
Addressing an invited audience of business owners and wealth-management customers this month in Albuquerque, Michael J. Stead, director of capital markets, said, “When I look at the futures market, which is the only thing that really matters because that’s where people put their money where their mouth is — it’s not an opinion; real cash is being put on the table — the futures market is telling us that we are starting to see blips where the expectation is for rates to start coming up.” Stead said that “you should be borrowing all you can and fixing your interest rate however you can.”
Scott Anderson, chief economist, said, inflation poses no threat today but “as you look out two or three years you might want to start protecting yourself” from inflation.
“Historically the (Federal Reserve System) has always been late removing the punch bowl,” Anderson said. “Usually you do see some inflationary pressure building before the Fed starts to tighten.”
“It is going to be a very similar year economically this year for us as the one that just passed, and 2012 wasn’t a great year for economic growth, or for global growth for that matter,” Anderson said.
The United States economy grew 1.5 percent from the fourth quarter of 2011 to the fourth quarter of 2012. Anderson said he expects 2013 gross domestic product growth to be 1.8 percent, but he said the pace should accelerate to 2.5 percent later this year.
“We’ve been growing gross domestic product for three-and-a-half years,” Anderson said. “We’ve been growing employment for the past three years by about 150,000 jobs a month.” To get the nation’s employment back to levels seen in September 2007 requires that the nation add another 4 million jobs, he said. Bank of the West forecasts employment will grow 1.5 percent this year.
“The real bright spot, the real change in outlook I’m seeing in 2013 is the trend in the housing market,” Anderson said. “There are millions of households underwater only about 5 percent on their homes now.” New home sales are up 8 percent this year; housing starts are up 18 percent.
“Inventories are extremely tight,” he said. There is a four-month supply of new homes at current sales rates and a 4 1/2 -month supply of existing homes. In normal times there is usually about a six-month supply, and a couple of years ago there was a 12-month supply, Anderson said.
He expects home prices to grow about 4 percent this year.
Households have made progress repairing their balance sheets, which has reduced debt as a share of income, he said. “The debt service burden is the lowest we’ve seen in U.S. households going back to the early 1980s, when Michael Jackson was at the top of the charts,” he said.
The result is consumer spending has surged. Automobile purchases are up 50 percent since 2009.
Personal income has improved, but Anderson doesn’t expect that to last. Payroll tax increases in January are eroding disposable household income, and some improvement in income late last year was due to companies paying higherthan-normal dividends to avoid higher taxes that threatened to take effect this year.
Anderson said he expects real disposable income to decline 3.8 percent in the first quarter of this year. That will slow retail sales growth. “Already Wal-Mart and some other low-income retailers have been reporting pretty bad sales traffic as a result of increased pressures,” he said.