One On One With Lynn Reaser, Economist, Bank of America
Tuesday, February 28, 2006
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SUSIE GHARIB: Despite today`s gloomy economic news, our guest tonight is still optimistic about the economy and says it`s on a solid growth track. Joining us now, Lynn Reaser, economist with Bank of America. Hi, Lynn.
LYNN REASER, ECONOMIST, BANK OF AMERICA: Hi there Susie.
GHARIB: Well, certainly investors were discouraged by today`s economic news. What are you seeing that they`re not?
REASER: Well, I think the economic fundamentals are still solid and we see jobless claims come down, which suggests that employment is rising, unemployment is lower. We`re starting to see some increase in wage gains, outstripping price increases. So I think the economy is on a solid track and most importantly, business confidence has picked up significantly.
GHARIB: Let`s go over some of the numbers Lynn, that came out, fourth quarter GDP, a weak number. You`re predicting 3 1/2 percent growth for 2006. Where is that growth going to come from?
REASER: I think it`s going to be broad based, but primarily we see the baton shifting from housing and consumer spending to the business sector. This means capital spending is likely to rise significantly as companies now have the cash and the incentive to increase productivity spending overall in 2006.
GHARIB: Give us your analysis on the consumer. We saw a report, a survey today showing weaker consumer confidence. Should we sort of rule out any robust spending by consumers?
REASER: I think not. We have seen consumer confidence drop sharply last fall, yet consumer spending held up relatively well. What we saw was an interesting split in consumers` confidence readings. Consumers still pretty confident about the near term, but they`re less certain about the falling six months. So I think that uncertainty is not isolated to consumers. Economists, the Federal Reserve and investors also are much less confident on what we`re likely to see at the end of the year.
GHARIB: Does that surprise you given that we`ve seen oil prices coming down, gasoline prices, home heating prices are all down. Shouldn`t the consumer be a little bit more upbeat about the future?
REASER: Well, there are many uncertainties in this world economy, a lot of geopolitical risk. Oil prices have been up and down. The stock market`s been up and down. The housing market is slowing, so there is certainly no shortage of events for consumers to worry about, yet the job market is definitely improving and I think consumers generally will be better off this year than they were in 2005.
GHARIB: You`ve mentioned a couple of times about the housing market slowing down, cooling off. What is your advice to home sellers and home buyers at this point?
REASER: Well, people selling their homes clearly are not going to be getting probably the price that their neighbors received just a few months back and in terms of people looking for a home to buy, this is a very good opportunity. They will have a better selection and a better chance to get the price that they`re looking for.
GHARIB: We saw recently that the Federal Reserve released its minutes and said it`s still concerned about inflation. Are you worried about inflation and do you think that the Federal Reserve is going to continue raising interest rates?
REASER: Well, I think there is some risk, but the fact that the housing market is growing suggests that we will not have that big driver of the economy that we had in 2005. So that suggests that the Federal Reserve in fact is probably close to the end of the tightening cycle that they need to achieve to put this economy on a sustainable track.
GHARIB: Now Lynn, if we continue to get economic reports like we did today, what do you think the impact is going to be on the market?
REASER: I think the market would be starting to become much more nervous about the economic outlook and also the implications for corporate profits. But the economy never moves in a straight line. We had some very strong numbers early in the year on retail sales, manufacturing production, so it`s not surprising to see some offset in February but generally the first quarter is going to look very strong.
GHARIB: All right. We`re going to have to leave it there. We appreciate your analysis. Thanks for coming on the program. We`ve been speaking with Lynn Reaser, an economist with Bank of America.
