PASADENA, Calif. -
That was the message from Kathleen Camilli, founder of New York City-based Camilli Economics. She said the Federal Reserve will do everything in its power to maintain growth. Camilli quoted former Fed Chairman Alan Greenspan's assessment that the risk of recession is 30%, adding, "I would put it at 10%, based on the leading indicators."
While some markers suggest the economy is contracting, others do not, Camilli explained. Specifically, the Weekly Leading Index usually turns down six months before a recession-but it continues to rise. Two other leading indicators, the University of Michigan's consumer expectations poll and the Standard & Poor's 500 Composite, have been "just muddling along" for two years-indicating neither expansion nor recession.
"We have to look at all of the indicators together, not any one in isolation," she said. "GDP is slowing because housing is negative, but unemployment is staying very low. Why? Because job creation is in small businesses, and therefore not captured in the non-farm payroll report."
Economic Resilience
Exogenous shocks such as major terrorist attacks do happen, Camilli cautioned, but no one can predict when one will occur or the potential effect on the economy. She said the U.S. economy has remained "resilient" in the face of the Sept. 11 attacks and the ongoing occupation of Iraq.
According to Camilli, the Fed is attempting a balancing act between growth and inflation. The Fed has stated frequently it prefers an inflation rate between 0% and 2%. Camilli predicted the Federal Funds rate will remain at 5.25% until January 2008. She noted the Fed's policy of hiking rates stopped in July 2006, which would mean 18 months of no changes. "They've done it before," she observed.
No More Speculation
As for the housing market, Camilli said American consumers are witnessing the difference between speculation and appreciation. She predicted it will take more time to work off the inventory of unsold homes that built up in response to the speculative rush to buy real estate in the past three years. While many fear prices will be negative, Camilli said she is not worried.
"Bubbles are fine, as long as people know they are in a bubble. Ride it and get out."
Camilli told attendees of WesCorp's Future Forum conference here the U.S. economy has been in transition from industrial-based to knowledge-based for the last 15 years. This transition, she asserted, requires higher levels of education and skills for a larger percentage of the population; abandonment of social, ethnic and religious prejudices; an influx of creative talent; and capital for innovation.
Everyone Wears Four Hats
Each person wears four "hats" in the economy, she continued. The first is "worker/producer," followed by "consumer," "saver" and "investor." Referring to the latter two, Camilli said the American savings rate is falling because the tax system encourages people to buy a house.
For years, she noted, only the wealthy invested, but the amount of money in 401(k) retirement plans is growing at a rapid rate. "The savings rate does not account for this," she said.
"Capitalism is the greatest economic system in the world. This has been proven by 150 years of experimentation, including other systems such as socialism and communism," she declared. "Globalization is lifting more people out of poverty and into the middle class, but capitalism and globalization together require economic and financial literacy. People can't just be workers, they must be able to save and invest."
