Expert Predicts Upbeat Economy

By Deneen Smith
Kenosha News

The U.S. economy is bumping through a series of tumultuous changes, but remains essentially strong, according to an economist speaking to Kenosha area business leaders Tuesday.

James Glassman, managing director and senior economist at JPMorgan Chase and Co., spoke Tuesday morning to a gathering of business and community leaders at the annual economic forum sponsored by the Kenosha Area Business Alliance and Chase bank.

Glassman said the economy is facing a series of challenges, including a sharp slowdown in the housing market, a lack of access to capital for people and businesses seeking credit, and changes in consumer spending and saving patterns.

But he said there is reason to be “reasonably optimistic” about 2008 despite challenges over the next year, and he said he saw little danger of recession.

Still, he said, “the next six months is going to be a little rough.”

Glassman said the nation is essentially in a housing industry recession, with new home builders struggling with a huge inventory of unsold homes and potential home buyers finding tightening credit standards are making it more difficult to buy houses, especially in expensive markets on the West Coast.

He said there is no sign of that turning around in the next year, and he expects home prices to fall another 5 to 10 percent.

While the decline in home prices has cut into economic growth, it has not been the disaster some believed it would be for the overall economy. Economic growth has slowed from about 4 percent to 2 percent, he said, but remained healthy.

“We had this idea that the U.S. economy was doing well because of the housing industry,” Glassman said. “The fear was that if we lost that we would be heading into a hard place, and that hasn't happened.”

Glassman said the collapse of the sub-prime mortgage industry has had an overall effect on the credit market. Rather than coming from traditional banks, loans like subprime mortgages had been bundled as securities and sold to investors, a trend that made access to credit easier for businesses seeking capital.

The implosion of the subprime market made the financial industry realize that it did not have a good idea of how those securities worked or how they should be valued.

“This whole process will have to become more transparent,” he said, and until then “the financial community will have a smaller appetite for risk because they didn't understand (the subprime market), and credit will get tighter.”

Changes in the housing market are likely to affect the way Americans spend — or save — their earnings.

He said American consumers have been a puzzle: Over the past 25 years, consumer spending has outpaced saving, with statistics showing the savings rate declining from about 10 percent to nearly zero.

Glassman said that should not be alarming because household wealth has increased steadily during that time due to gains in investments and in real estate holdings, and because inflation has remained in check.

“Consumers have had two decades of unprecedented windfalls,” he said. “We're not saving because we don't need to.”

He said the shifts in the real estate market and in lower stock market gains are likely to mean that Americans will shift back to more traditional savings.

“We'll start to see consumers saving again,” Glassman said. “I think that years down the road we're going to look back and see this is the time that started to happen.”

Glassman said the world econ omy, and the American economy, are also dealing with shifts in the global work force, with the loss of manufacturing jobs likely to continue in the United States.

“My guess is that we're not going to see that level off in our lifetimes, maybe in our kids' lifetimes,” he said. “It won't happen until wage disparity evens out, and that will happen.”

But Glassman said the economy has been able to absorb those manufacturing job losses in the United States, with unemployment remaining at around 4 percent.

While there are serious challenges facing the economy, especially the housing market, Glassman said he is generally upbeat.

Inflation remains low, corporate profits are at record highs, corporate inventories are low, economies in industrialized Europe and Asia are strong, and the developing world, including China and India, are growing astronomically in what he termed “the second industrial revolution” bringing unprecedented levels of wealth to previously impoverished areas.

“Prosperity is spreading all around the world,” he said.