Economic Rebound? It's Here, Argues Fed Analyst

Register now

The long-awaited economic recovery will officially arrive during the current quarter, according to one person.

The U.S conomy has been outperforming expectations since Sept. 11, 2001 and is poised to perform even better, but perceptions about the economy are being driven largely by the lack of new job growth, according to Jim Glassman, director, U.S conomic and policy issues research for JPMorgan Chase. Glassman predicted the government will report third quarter gross domestic product growth of approximately 5% next month, and a surge in hiring should follow. "I am very upbeat about the economy," he said. "I know many people are skeptical, but just give me five weeks until the GDP report is released."

Glassman, who delivered a keynote address that capped the first day of WesCorp's Credit Union Outlook 2004 conference, served as a senior economist for the Federal Reserve from 1979 to 1988. He acknowledged that economists have been predicting recovery for several quarters in a row, but insisted the economy is primed to surge forward.

Thanks At Thanksgiving

Some people believe-mistakenly, Glassman said-that America still is in a recession. In fact, one of the statistically mildest recessions in history ended several quarters ago. This negative perception exists due to the fact unemployment continues to hover around 6%.

"The unemployment rate gives the feeling things are going poorly, but companies have become so productive they don't need to hire unless growth is greater than 3%," he said. "Growth has been 3% or less since 2001. My guess is there will be positive news on job growth by Thanksgiving. And no one will be questioning the sustainability of what's going on."

The Fed has been "obsessed" with inflation for 30 years, Glassman asserted, pointing to Fed efforts to bump up rates as the economy heated up. "Now, you need a microscope to find inflation. This is the most significant development of my lifetime," he declared.

If anything, Glassman said, the rate of inflation is too low. He believes today's 1% inflation rate adds six months to a year to the Fed's timeline - meaning he expects interest rates to remain low for some time. "When (Fed Chairman) Alan Greenspan says he'll keep rates low for a while, believe him. They won't mention it, but the Fed wants inflation at about 2%. Low inflation means the Fed must be cautious o one living has seen this problem. People are scarred by their memories of (the high interest rates of) the 1970s. But the Fed won't tighten credit for at least a year. They only will tighten sooner if there is a really rip-roaring recovery."

When unemployment dips to 5.5%, Glassman believes the Fed might think about tightening the reins on the economy.

Glassman said corporate America will drive the rebound. "Inventories are at record lean levels. There has been a steady decline in inventories the last 20 to 30 years because of technology, but they are low even by that standard. There is a pent-up spending demand in the business sector."

According to Glassman, one indication that corporate America sees an improving picture is the increase in capital spending. He believes the third quarter economic report could see the highest business capital spending in a decade, with the most substantial investments in information technology. "As the economy speeds up, the benefits will flow to everybody," he said.

Deficit, Schmeficit

Tax cuts in 2001 and this year helped boost consumer spending, but also contributed to the federal deficit. Glassman said he is not concerned about the deficit, terming it a "tool to fix things." He said both the Fed and Congress are flooring the accelerator at the same time, which is historically rare.

"What happened in the 1990s was an appetizer - a taste of what is to come," Glassman said. "Many economists refer to it as a bubble, but many of those trends still are in place. Low inflation guarantees a long, stable expansion. We are in the middle of a very positive story."

For reprint and licensing requests for this article, click here.