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Economic Environment and Market Expectations
Dr. Anthony Chan
Senior Economist, Banc One Investment Advisors
The U.S. economy is getting better and will continue to grow this year, according to economist Anthony Chan. Higher interest rates and substantial job growth in certain sectors are the key indicators pension fund investors should watch.
Since the 2001 recession, Chan noted, the economy has grown consistently: in 2002 the increase was 2.2%; in 2003 it was 1%. He predicts economic growth this year could be 4.5%. History shows that the growth of the economy this year was to be expected, Chan said. Average yearly real GDP growth during presidential election years always increases—no mater the party of the person in the White House.
The equity market also does well in presidential election year, Chan said. However, the best year for equities in a presidential cycle is typically the third year, in anticipation of the predictable growth in the fourth year. As one example of this trend, Chan noted that earnings last year were up 28%; he predicts 15-16% growth for the current year.
Chan noted that consumer confidence remains high, reflected in consumer purchases. Consumers will carry the economy in the next year. Refinancing of home mortgages helped boost consumer spending last year because of the record number of homeowners who refinanced their homes.
There is some bad news, notably the trade deficit. Chan believes that problem will lessen in the next two years.
The Achilles heel of the U.S. economy, Chan said, remains the jobs picture. “We should have created five million nonfarm jobs since the recession,” Chan said. “But we have actually reduced the number of jobs.” That situation will change as quickly as the next fiscal quarter—when 250,000 new jobs a month are possible during the next year. The increase will be due in part because productivity will slow down by 1.5% this year. When productivity declines, jobs are created.
Historically the federal funds rate moves in tandem with employment gains. So as the employment rate accelerates, interest rates also will go up. Chan expects the Federal Reserve will raise interest rates by one-half percent in 2004, another 1.5% in 2005. These increases suggest likely changes in the equities market. When interest rates rise, the financial sector suffers, while the basic commodity sectors benefits.
Chan predicted good news for the manufacturing sector. Nearly three million jobs were lost since the recession. This year, however, Chan expects a net gain of 150,000 manufacturing sector jobs.
As the senior economist at Banc One Investment Advisors, Dr. Chan sets the investment agenda for $180 billion in assets under management. He has served as a member of the Economic Advisory Committee, which briefs Alan Greenspan and the Board of Governors in a twice-a-year off the record session.
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