JP Morgan Analyst Sees 'Opportunities Galore' In Economy

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The disruption of Hurricanes Katrina and Rita, combined with having New Orleans "offline," will slow economic growth in the United States in the fourth quarter, but the overall economy is in good shape, according toone economist.

That was the message from James Glassman, senior economist for JP Morgan Chase. Glassman's forecast varied slightly from the optimistic economic predictions given at the recent WesCorp CU Outlook conference here. Glassman said he foresees "opportunities galore" in continued GDP growth and low inflation, though he did see more of a negative impact from Katrina.

"Natural disasters destroy wealth, but typically not GDP. That's because GDP is a measure of how busy we are, not how well off we are," he said. "However, in the case of Katrina, you have a situation where people cannot go back to work."

Of special interest to credit unions watching rising interest rates, Glassman said he expects the Federal Reserve will continue its pattern of raising the Federal Funds rate for a few more meetings. The day before he spoke, the Fed raised the rate to 3.75%.

"Some economists believe we are in the late innings of expansion. They cite as evidence the low, 4.9% unemployment rate," he said. "But I believe we are in the third or fourth inning of the expansion, with a long way to go. I think the Fed will get out of the way when the rate gets to 4% or 4.5%."

The Fed's assumption is: when the economy is good and needs no help, the Funds rate should be just above inflation, Glassman explained. If the Fed stops raising rates relatively soon, that is "taking the foot off the gas." If the Funds rate goes two points above inflation, that would be "stepping on the brakes."

The consensus is, the Fed is near the end of this process, he said. One big reason-there is a great deal of historical precedent for the damage caused when short-term rates are pushed higher than long-term rates. When this happened in 1973 and 1979, the economy went into recession.

"There might be one or two more moves, because the Fed would not deliberately risk recession by pushing short-term rates above long-term rates."

Good Growth, Slow Hiring

According to Glassman, recent GDP growth has been comparable to the 1990s, but hiring has been slower. He said outsourcing is not the issue-"if we were outsourcing these jobs, we wouldn't be generating all this GDP"-but faster growth still is needed to spur the creation of more jobs.

One large barrier is the rocketing price of crude oil. Glassman said the U.S. has never seen a recovery accompanied by a surge in oil prices as we've seen in the last two years. He attributed the rise to oil producing countries going "to sleep" the last five years. They saw the U.S. economy in recession in 2001-02 and underinvested. Today, the American economy is expanding, as are the economies of China and India.

"Oil consumption is growing faster than OPEC realized," he said.

Despite climbing fuel prices, inflation remains microscopic, Glassman continued. He said too many people overreact when inflation moves to 1.6% from 1.3%.

"I come from an era when inflation was in double digits. I believe we misinterpret the effect of oil prices. Energy prices will continue to go up, but other prices will go down-except for items such as airline fares that go up because of a rise in jet fuel."

Glassman said that the deregulation of the past 25 years has led to "something big" for the U.S. economy.

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