Schwab investment strategist sees signs of recovery

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

While the U.S. economy continues to show signs of recovery from the recession, popular sentiment lags. Consumer confidence remains low.

The September consumer confidence index, reported by The Conference Board, was 48.5, down from 53.2 in August. The survey samples about 5,000 households across the country and asks them their feelings on the current and future economies.

Unemployment on the national scale remains at nearly 10 percent. Home sales have fallen again recently.

Despite these signs, the economy is showing positive movement, and there is reason to be optimistic about the future, according to Liz Ann Sonders, senior vice president and chief investment strategist with Charles Schwab & Co., Inc. Sonders also chairs Schwab’s Investment Strategy Council, which provides strategic asset allocation guidance and recommendations for the firm’s investor base.

Sonders recently addressed a group of clients of Madison-based SVA Wealth Management Inc. at the Milwaukee Art Museum. She spoke with BizTimes reporter Eric Decker before the event, and the following are excerpts of that interview.

What kind of progress has the U.S. economy made this year, and where do you see things going by the end of the year and into 2011?

Sonders: “I think the underlying conditions are a bit more optimistic than what a lot of people are giving them credit for. When you look at the corporate side of the economy, it’s incredibly healthy. There’s $2 trillion in cash on their balance sheets, phenomenal profitability that does not match the level of capital spending or the level of hiring. I think there’s a gap narrowing coming – when the confidence returns.

“Confidence this time is more than this abstract emotion. It is the pervasive issue that is keeping this recovery from getting a little bit more traction. I think it is quite amazing that we are a couple of months from year’s end and (have) the potential for a major tax increase by virtue of the expiration of the Bush tax cuts and we don’t have some clarity on what’s going to happen. I think it’s going to (be resolved) in the lame duck session.

“There’s also (financial) regulatory overhaul – part of the way that was written was to allow Congress and the regulators themselves to write future rules down the road. They haven’t written a lot of that yet, so the costs associated with that are as yet unknown.

“We’ve got health care rolling in over the next several years. The costs associated with that are unknown. The marginal costs associated with hiring a worker – the tax piece of it may be solved, but the other pieces are not. So I think there are still going to be a lot of uncertainties that potentially plague the situation. But the tax piece is a big one, and I think that will be gone.”

BizTimes: How long do you see this economic uncertainty lingering?

Sonders: “My best guess is that we’re going to see a certain freeing up of this confidence or the lack of confidence sooner rather than later. Animal spirits will drive businesses to invest and start hiring even in the face of many of these continued uncertainties.

“We’re already starting to see more liquidity in the credit markets. The percentage of banks that are tightening lending standards has come down quite a bit. Demand for C&I loans is up, we actually have the first positive cross in seven years where the demand line has crossed higher than the supply line.

“The building blocks for a broader improvement to credit as a driver to the economy are in place. You’ve still got banks sitting on a tremendous amount of capital, but they’re in the business to lend. And I think (they will) once demand starts to pick up. It’s a little bit of a chicken and an egg, there’s not a bell that rings one day, it’s just something starts the cycle that kicks in.

“I think we are getting there.”

BizTimes: The housing market took another dive recently. Isn’t a recovery in housing needed to spur broader economic recovery?

Sonders: “Too many people assume that we have no hope for recovery unless we get strong housing. I disagree with that. I think housing, by virtue of its implosion, has mathematically become a less important part of our economy than it was in the boom years. And therefore, even if we don’t get of a bounce off the bottom, I think it’s no longer an economic detractor. I don’t think you need it to see any kind of reasonable growth.

“We finally have low and appropriate real mortgage rates. It’s not a concept that a lot of people talk about, but it’s one I paid a lot of attention to particularly during the ugly part of housing. Much like real GDP – nominal GDP minus inflation, the real mortgage rate is the nominal 30-year fixed mortgage rate minus the rate of inflation or deflation in homes. Now you have a 4-percent, 30-year fixed mortgage rate, minus about a 2-percent rate of appreciation (which) equals about a 2-percent real mortgage rate. That doesn’t mean we’re going to be off to the races. But you have to have that building block to have any hope for anything other than a continuing implosion. Housing affordability is near a record high. House prices relative to income have come back down to long term norms. Everything is falling back into place for stabilization.”

BizTimes: What about consumer spending? Isn’t that another crucial part of our economy, and isn’t the lagging consumer confidence reflective of sluggish economic growth?

Sonders: “There is too much of an obsessive focus on consumer spending as a driver of the economy because of the math that it is 70 percent of GDP. You don’t necessarily need a big boom in consumer spending if you have got other drivers all firing.

“The worst quarter for the recession was Q4 2008, which was minus 6.5 percent GDP. Consumer spending was only down fractionally. It was the other big components – business investment, residential investment, exports and imports all got crushed.

“Conversely, the fourth quarter of 2009 was the best quarter in recovery so far, and you saw the needle move very little on consumer spending, but you saw big shifts in everything else. Business investment went deep negative to positive, residential investment, business capital spending – all of those things. I think people underestimate the collective power of the other drivers of the economy.

“Consumer spending I think in this phase will be tied to income growth. In order to get income growth, we need a better jobs environment.”

BizTimes: Where do you see unemployment going as a rate over the next 18 months?

Sonders: “I don’t have a hugely optimistic outlook on jobs, but I think it’s going to get a little bit better than people think, and it’s going to get better a little sooner than people think. The unemployment rate, I think, goes up before it goes down. But that’s normal. The unemployment rate always peaks after the recession is already over. It’s the ultimate lagging indicator.

“Some of that is a function of demographics with the baby boomers. We have such an aging pocket, I think a lot of those disaffected workers aren’t going to go back to work. And they have no intention of going back to work. They’ve hit their retirement years and they probably don’t have as comfortable a retirement as they might have five years ago from a market perspective. But not all of them are in dire economic straits and have to go back to work.

“Some of them may work part time or on a consultant basis. And we are changing to an environment where there are more temporary workers, workers want more mobility. One of the other unique factors about this job recovery or lack thereof is the lack of mobility factor.

“I think you’re going to see more consulting type situations, more temporary work. That is seen by many as a big negative. I don’t necessarily know that it’s necessarily a negative, I think it’s just a reflection of a new era that we’re in that’s just different. People are approaching their homes differently and their work life differently.

“We have to be careful about doing apples to apples comparisons between this environment and this recovery with past recoveries. I’m not saying everything’s just fine and you’re not looking at it the right way. It’s been an ugly situation, but there’s a lot that’s permanently different about what has happened in our economy and our lives and demographics.”

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