One on One with Brian Wesbury, Chief Economist at First Trust Advisors
Thursday, July 05, 2007
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SUSIE GHARIB: Our guest tonight is upbeat about the U.S. economy and says tomorrow's employment report will show that American businesses are growing and hiring. Joining us now, Brian Wesbury, chief economist at First Trust Advisors. Hi, Brian.
BRIAN WESBURY, CHIEF ECONOMIST, FIRST TRUST ADVISORS: Hi, Susie, good to be with you.
GHARIB: Brian, you told me that you revised the payroll numbers that are coming out tomorrow in the employment report to 150,000 new jobs. That's much higher than most estimates. Why so bullish?
WESBURY: We were at 120 but the initial unemployment claims data stayed very low, which suggested there aren't any mass or aren't a great deal of mass layoffs out there. Also, the ISM, the Institute for Supply Management, both manufacturing and services sector, especially the services sector numbers for employment were very strong. And then finally, a number that I put a little less credence in but the ADP, the payroll company's report, they estimate payrolls every month, that was a little bit better -- in fact, significantly better than the market expected it to be. So the bottom line is when you put all of that together, it looks like we're going to have a better report than we originally thought.
GHARIB: And what about wages? What's your forecast? Will those also show higher growth?
WESBURY: I do believe so. I think we're going to have 0.3, possibly 0.4 increase in average hourly earnings which puts us up about 3.8 percent from a year ago. Anywhere in that 3.8 to 4.1 percent range is roughly equivalent to the kind of wage gains we saw in the late 1990's. All of that is good news and so while some people are worried today about a pullback by the consumer because of high gas prices and faltering housing market, I'm not one of them. I think we're in a pause. We've been in a little bit of a slow growth period but I think the consumer is going to come back, because jobs are plentiful, unemployment is low, and wages are rising.
GHARIB: So with that kind of scenario it would seem like the Federal Reserve would have to get worried about inflation and raising interest rates. What do you think there?
WESBURY: Yeah, I don't think inflation comes from growth, but growth is a signal of whether the Federal Reserve is tight or not. And there were many people that believed that the housing slowdown last year and the slowdown in the overall economy as a result of that housing slowdown was a sign that the Fed had hiked interest rates too much and I've never believed that. Now the rebound that we've seen in the economy, it looks like real GDP growth is going to rebound right into that 3.5 percent to 4 percent area here in the second quarter and then on into the third and fourth and if the consumer comes back and the economy is strong, that means the Fed wasn't too tight, I'm looking at gold and commodity prices and the value of the dollar and they tell me also that the Feds not too tight. Therefore, I think inflation is on the rise. I think we've been in a little lull with that too. But it's going to rebound here later in this year so with strong growth and rising inflation, I don't think the Fed will have a choice but to hike interest rates, especially after the Bank of England is raising rates today.
GHARIB: When might that happen with the Federal Reserve? Would it happen in 2007?
WESBURY: Yeah, I still think it would, Susie and this is a great question. We used to have that rate hike happening right around now in the middle of the year, but we pushed it back and so our official forecast right now calls for a December rate hike. I will say that there's really no great way to actually pinpoint it. I do believe it'll happen in the fourth quarter. If it doesn't happen then, it'll happen very early in 2008.
GHARIB: Brian, I know you're not a market strategist, but what would be the impact of higher interest rates, let's say it does happen in the fourth quarter of 2007. What would that do for the stock and bond markets?
WESBURY: Right, well our models right now of the U.S. stock market show that on a broad basis, it's undervalued by 20 percent. And just for reference, I use a 6 percent 10-year Treasury yield in my model. So that's about 90 basis points above where it is today. We're only 5.15 today or 5.10. And so I've already incorporated higher interest rates in my model so rising interest rates won't hurt. I still think that the market will be undervalued. The second thing to remember is that the Fed raised rates 17 times between mid-2004, mid-2006 and yet the stock market was up during that time. Raising -- Fed rate hikes are not always killers for the stock market like many people believe.
GHARIB: All right, we'll have to check in with you if that scenario plays out the way you've said. Thank you so much for tonight though, appreciate it.
WESBURY: Thank you, Susie.
GHARIB: My guest tonight, Brian Westbury, chief economist at First Trust Advisors.
