One on One Stuart Hoffman, President of the National Association for Business Economics
Monday, August 28, 2006
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LINDA O`BRYON: A new survey of business economists shows they now think terrorism and energy prices are the biggest short-term risks to the U.S. economy. And one key risk when it comes to energy is that high oil prices could cause a recession if crude goes above $100 a barrel. Earlier today, I talked with Stuart Hoffman, president of the National Association for Business Economics, which did the survey. I began by asking him if saw any surprises in that survey.
STUART HOFFMAN, PRESIDENT, NATIONAL ASSOCIATION FOR BUSINESS ECONOMICS: I don`t know if would I call it a surprise, but we did see that when we asked what the greatest near-term risk to the economy was, acts of terrorism rose to the top of our list, almost one out of three of our respondents out of 300 economists that are members of NABE. It actually just moved ahead of high energy prices. I don`t know if it was a surprise, but when the survey was being taken, you know, is when we had the fighting in Lebanon and when we had the foiled terror plot in London. So maybe that`s what was on people`s minds at the time they were filling out the survey.
O`BRYON: Well in looking at a comparison to a similar survey last year, the two areas of concern that showed large increases were, as you say, that threat of terrorism and worries about inflation. Yet the concerns about energy were almost the same. What were the reasons?
HOFFMAN: Yeah, I think because energy has been just a constant backdrop. They`ve -- prices have gone up and down, but the concern about geopolitical events, whether it`s in Iran or Venezuela, acts of terrorism hasn`t gone away. As you noticed, what moved up this concern about inflation although it`s still a distant third. I think only 12 percent of the respondents said it was the biggest near-term risk to the economy. But you`re right, compared to a year ago, it was below 10 percent, still a low number. But, you know, given that inflation has been higher, I think that made it the top choice of a slightly greater number of people. But energy and terrorism were still pretty far ahead in terms of one and two, short- term concerns.
O`BRYON: The survey also looked at long-term challenges to the U.S. economy and another picture emerges there. What are the biggest long-term concerns?
HOFFMAN: There are two long-term concerns and two long-term strengths. The long-term concern is still the budget deficit, even though in recent months and probably for this full year ended September 30, the budget deficit is going to go down. Over a longer period of time, five or 10 years, concerns about funding the budget deficit, Medicare, Social Security was top of the list. The second was our education system, obviously having an education system that educates the young people in America for the jobs of tomorrow. In terms of the strengths, though, the group felt that our flexible economy, our flexible job market, was our top strength. And second, our worker productivity and the technology and R&D, research and development, that we do so well in this country. So it was somewhat of a balanced picture. Certainly there are long-term weaknesses, but there are also two very important long-term strengths.
O`BRYON: The survey also weighed in on monetary and fiscal policy with some very different opinions between the two. What happened there?
HOFFMAN: Monetary policy, 71 percent said it was quote, about right. That`s as high a number as we`ve had in a while. Of course the Fed has been raising interest rates for over two years and now nearly three quarters of the respondents say the Feds got it right, they`ve done a good job. Slightly more than half still thought they might raise the rate one or at most two times, but a growing number actually thought the Feds` next move may be to cut rates. But the key is that the majority thought monetary policy was about right. For fiscal policy, though, most people thought it was too stimulative and that it was split between those who thought the tax cuts should either be ended and those that thought they should be extended. But almost all of them, almost 80 percent thought that growth of government spending, which has been well above inflation, needed to slow down over the next couple of years. Unfortunately, not that many of them actually thought that would really happen.
O`BRYON: We just have a few seconds remaining. What about concerns regarding consumer spending?
HOFFMAN: We didn`t specifically ask in the survey about consumer spending. But I think in other surveys that NABE has done, in fact one coming out now or that we`re taking now, I think the majority will suggest that consumer spending will slow down as interest rates and energy prices have risen. But continued growth in jobs and wages will counter balance that. So slower growth and consumer spending, that`s more my personal opinion. We`ll have to wait just a little while for the next NABE survey to get the details of which they think consumer spending will do. There was not an outlook for recession in this survey. O`BRYON: All right. We`ll look for that next survey. Stuart, thank you for joining us.
HOFFMAN: Thank you very much.
O`BRYON: I`ve been speaking with Stuart Hoffman, president of the National Association for Business Economics.
KANGAS: Prudential financial today agreed to pay $600 million to settle civil and criminal charges that it market-timed trades of mutual funds. The settlement is one of the largest in the three-year long probe of market-timing in the mutual fund industry, and individual Prudential brokers have already been charged in the case. Stephanie Dhue reports.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Prosecutors say from 1999 through June of 2003, several Prudential securities brokers illegally traded in and out of mutual funds to generate profits for hedge fund clients.
PAUL MCNULTY, DEPUTY ATTORNEY GENERAL: These brokers defeated safeguards designed to protect against such illegal market timing trades by using false accounts and false identities to give the impression that the trades were coming from many different unrelated brokers representing many different clients.
DHUE: Prosecutors say the Prudential brokers made $50 million in commissions and generated $100 million in profits for their hedge fund clients at the expense of average mutual fund investors. Under terms of the settlement, a $325 million criminal penalty will be paid to the Justice Department, $270 million will be paid to a fund to be distributed to victims of the fraud and a $5 million civil penalty will be paid to the Massachusetts security division. Prudential, which admitted guilt, also agreed to a deferred prosecution, which means it could face criminal charges if it violates the agreement in the next five years. Regulators say Prudential executives didn`t stop the fraud.
LINDA THOMSEN, ENFORCEMENT DIRECTOR, SECURITIES AND EXCHANGE COMMISSION: Mutual fund companies sent more than 1,000 letter and e-mails to Prudential, many of them notifying the company that its representatives were using deceptive trading practices and asking Prudential to stop the activity. High level officers of Prudential were aware of the complaints, but the company failed to take action to stop the fraud.
DHUE: In a statement Prudential says it has strengthened its compliance programs and quote, this settlement represents our desire to do the right thing and to put this matter behind us, end quote. Observers say Prudential will be on its best behavior.
DON LANGEVOORT, SECURITIES LAW PROFESSOR, GEORGETOWN LAW SCHOOL: No securities firm can afford to be the subject of a criminal prosecution. It just takes you out of too many lines of business. It can be a death knell to the firm.
DHUE: Prosecutors say the investigation continues into market-timing abuses in mutual funds. Since the probe began in 2003, 16 firms have reached settlements, totaling more than $4 billion. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
