Experts say economy should weather global storm

Last updated on July 2nd, 2019 at 10:59 am

The unfolding crisis in Japan, rising energy and commodity prices, military action in Libya and other global events are having an effect on the U.S. economy, but are unlikely to tip the country back into recession, several Midwestern economists say.

“The forecast we put out in early January called for 2.5 to 3 percent GDP growth for the year, and I think that will be pretty accurate,” said Bruce Bittles, chief investment strategist with Milwaukee-based Robert W. Baird & Co. “I think (the economy) was gaining some steam – we expected the first half of the year to be decent with a slowdown in the second half.”

Consumer spending remains relatively weak, the housing market remains depressed, energy and food costs are rising and wage gains have been modest over the last 18 months, Bittles said.

“The job market remains tenuous, and I think that’s eating into consumer confidence,” he said.

The crisis in Japan will result in more export opportunities to that country, but will also increase inflationary pressures, said Paul Kasriel, chief economist with Chicago-based Northern Trust Company.

“Japan is going to have to look at different sources of energy and electricity now that some of their nuclear plants are offline,” Kasriel said. “They are already a large importer of natural gas, which they will increase for the near term. Japan is going to become a bigger importer of not only natural gas, but also copper, lumber and a whole lot of raw materials for rebuilding.”

Because of contamination concerns, Japan may also increase its food importing and will likely boost its imports of U.S.-produced food products. Japan already imports large amounts of pork from the U.S., Kasriel said.

“The main effect from Japan will probably be an increase in global inflationary pressures,” he said. “Some industries are working flat out (and cannot increase production). The demand is going to translate into higher prices rather than increased output.”

Japan is one of the largest economies in the world, and remains a key manufacturer of specialized components. Because some of its manufacturing capabilities have been compromised, there will be some disruption to the global supply chain, which will in turn cause fits and starts in certain industries.

“That could have a huge impact on production schedules,” said Sara Walker, senior vice president and investment officer with Associated Wealth Management. “It is disruptive, and I think we’ll see a much lumpier year of growth than we were expecting. They do provide parts and input to many manufacturing processes around the globe. That will produce some of the lumpier growth globally with some impact in the U.S. I do feel that we’ll work through that. It’s not a perfect situation, but it’s something we’re resilient enough to work through.”

While some analysts are speculating that gas prices will breach $5 per gallon or higher this summer, Walker does not agree.

“Will we have $4 a gallon? We’re close,” she said. “If there is more disruption (to production) I could see it coming. But I don’t see it tipping our economy into a recession. There is enough momentum and growth – we have healthy corporate financial conditions, we’re seeing strong manufacturing results and continued growth in our overseas markets, which is helping our exports. Will $4 gas tip us into recession? It will keep us below optimal levels, but I don’t see it tipping us into recession. We’ve been there, done that.”

Walker and Kasriel both said that the situation in Libya will not affect U.S. oil prices, because Libyan oil is consumed by European customers. However, greater unrest in the Middle East is a cause for concern.

“The biggest risk out there is Saudi Arabia,” Kasriel said. “What’s happening in Bahrain is kind of a proxy conflict between Saudi Arabia and Iran, or it could be. The biggest risk is that if it were to transform into a major uprising that would interfere with the ability to pump oil. Then we’re talking about a global recession. That’s what people should be most concerned about.”

Sign up for BizTimes Daily Alerts

Stay up-to-date on the people, companies and issues that impact business in Milwaukee and Southeast Wisconsin

No posts to display