Outlook for next three years is positive; virtuous cycle has begun
By Mark Green
Editor of The Lane Report
LEXINGTON, Ky. (July 23, 2014) — U.S. economy prospects are positive for the next three to five years with long-term financial and business cycles that have been vicious since the Great Recession turning virtuous and reinforcing, according to the chief investment strategist for Fifth Third Private Bank.
Jeff Korzenik presented a distinctly optimistic view Wednesday to a pair of Lexington audiences of Fifth Third Bank executives and invited guests, citing multiple large-scale long-term trends that have either emerged unexpectedly, such as cheap abundant U.S. energy, or that have worked out since the Great Recession, such as consumers paying down excessive debt.
“Especially the credit cycle,” Korzenik said, in laying out the arguments that negative financial metrics and market psychologies are changing for the better and becoming growth inducing.
The recession and global financial crisis from late 2008 into 2010 did cause much more destruction than a typical recession, he said.
“It was the 15th financial panic in United States history,” said Korzenik, who has a Princeton economics degree and 27 years experience in research and management roles with some of the nation’s largest investment firms, including posts in Boston, Chicago, London and New York.
Fifth Third Private Bank is an investment and insurance services and products division of Cincinnati-based Fifth Third Bancorp, which has $133 billion in assets and 15 affiliates with 1,309 full-service banking centers and 2,619 ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri, Georgia and North Carolina.
Most previous U.S. panics occurred in the 1800s, and they create more damage than a basic contraction in the economy, which defines a recession. The Great Recession was caused by credit issues, Korzenik said, and the reaction by consumers, whose spending is considered to generate 70 percent of U.S. GDP, was to focus for years on paying off debt rather than spending.
Traditional corporate America was not overextended in the manner many U.S. households were, he said. However, CEOs, CFOs and boards of directors acted as if they, too, had the same financial issues as households and individuals. Corporate America “has hoarded cash.”
Now, though, based not only on research by Korzenik’s office but discussion with many of Fifth Third’s major customers, corporate capital investment is beginning.
“That’s a big plus for the economy,” he said.
Recent government and media reports indicate U.S. corporations have accumulated more than $1.5 trillion in cash and cash-like assets.
Other U.S. economy pluses include that the economically crucial housing sector has moved back to basics with supply and demand being driven by demographics. Construction is increasing, Korzenic said. A virtuous cycle has begun in which housing growth stimulates multiple other sectors of the economy, creating more jobs and higher wages and, thus, further increasing housing demand.
Manufacturing is returning to the United States, especially from China where labor costs have doubled in 15 years while falling 20 percent here. Companies that sell physical goods increasingly are again placing production facilities in the traditional U.S. manufacturing regions, attracted by skilled workforces and local business and government cultures that value manufacturing. Intel reneged on its commitment to build a research and development facility in China, and Whirlpool recently built a factory in Texas, its first U.S. facility in decades, Korzenic said.
Newly cheap and plentiful energy, however, “is truly transformational for the U.S. economy, and we’ve only begun to scratch the surface,” he said. The first U.S. crude oil export permits in years were just issued. The United States recently surpassed Saudi Arabia as the world’s largest crude oil producer as well as surpassing Russia as the world’s largest overall energy producer.
A U.S. energy “revolution” based on new technology such as hydraulic fracturing, or fracking, of oil- and gas-bearing shale rock formations “began about six years ago,” Korzenic said. Since government permitting for major energy projects typically takes seven to nine years, he said, the nation is only just entering a “boom” of plentiful and affordable energy.
U.S. consumers cut spending when costs to fuel their vehicles increase, as they have since 2009 when gasoline spent months below $2 a gallon. Natural gas is becoming so inexpensive and plentiful that major fleet operators such as Waste Management already have converted their trucks, and states such as Oklahoma have built out networks of NG filling stations. Korzenic said the prospect of a nationally useful network of NG stations for transportation fueling could be reality in as little as five years, and it will offer consumers the option of halving their personal vehicle fuel costs.
Additionally, local and state governments whose low revenues and high pension costs kept them from playing their traditional roles in helping the U.S. economy recover from recession are now seeing rising tax receipts. They now are starting to hire new employees, Korzenic said, and will continue to do so within the foreseeable three- to five-year time frame.
And the U.S. economy has strengthened to the degree that foreign events have less ability to influence domestic business activity, he said, pointing out that while the Greece debt crisis of a couple of years ago was considered a threat with the potential to cause the United States to see a double-dip recession, today the Russian annexation of Crimea and threat to seize eastern Ukraine has had no impact on U.S. business.