Recession Ahead? No Way, Says Wachovia's Chief Economist
Posted January 5, 2006
RALEIGH — A bit of a food fight broke out at the 2006 Economic Forecast put on by the Greater Raleigh Chamber of Commerce on Wednesday.
John Silvia, chief economist for Wachovia, delivered a relatively upbeat assessment for 2006, predicting a strong local economy and a national economy that will be good but not as strong as 2005.
When he was told that an economist at the University of North Carolina was predicting a recession as soon as 2007, Silvia begged to differ.
"I just don't see it," Silvia said in remarks after the session ended. He cited a litany of statistics, ranging from housing starts to job growth. "That's why I disagree about a recession."
The recession question arose when Harvey Schmidt, who runs the Raleigh Chamber, read a portion of a Bloomberg News article citing comments from James Smith of UNC. Smith has been critical of the Federal Reserve in pushing up interest rates.
Smith, who teaches finance, cited an "inverted yield curve" which occurs when the yield on two-year Treasury notes exceeded those of 10-year notes. That happened last week, and it was the first time such a "curve" had occurred since December 2000 - just as the last recession hit.
"When the curve inverts, run for the exits," Smith told Bloomberg. "It will stay that way until the (Federal Reserve) realizes it caused a recession in 2007. Investors should start planning for a recession."
Silvia, a well-known national commentator on economic issues, said he would not rely on one such factor in predicting a recession. And the Bloomberg story noted that no other economist it surveyed expected a recession. Bloomberg also pointed out that Federal Reserve Chairman Alan Greenspan said recently that the yield curve has "lost its capability" in recent years of being an indicator of when a recession might occur.
"If we have a recession," Silvia told the Raleigh crowd, "don't invite me back."
Bullish on Raleigh
When talking about the Raleigh area economy, Silvia is upbeat.
"For this regional economy, yes," he said when asked if he was bullish about 2006.
"The economic base fits where the growth is occurring - health care, education, government, professional and business services. There is no downside to state government."
In a question and answer session, Silvia praised Raleigh for its balanced employment as a reason for continued growth.
"RBC Centura coming here is real good," he said, noting the recent decision by the bank to build a new headquarters downtown.
"You don't want to be a one-trick pony," Silvia said, cautioning against too much reliance on state government or as being a university town. "You really need a diversified economic base."
Silvia cited the percentages of workers in certain fields, such as government (19.2 percent), professional and business services (15.7 percent), trade (16.3 percent) and education and healthcare (9.2 percent) that reflected the balance a metropolitan area needs for consistent growth.
Silvia cited "tremendous in-migration" of new residents as a reason why the capital city's economy has produced what he called "a rich community" with a per capita income above $30,000 and exceeding the national average.
"You've been up every year for the last seven years in housing prices," Silvia added. "There is a lot less of a housing bubble here that in other areas because of the in-migration."
In looking at the national economy, Silvia described the 16 consecutive quarters of at least some growth in the GDP as reaching the "trend expansion" phase following the 2001 recession.
"The economy continues to expand," he said. "The drop in jobless claims is a key indicator."
The number of people seeking jobs spiked following the summer's hurricanes. However, the trend fell off sharply in the fall as more people found work and the economy absorbed the hit from the storms.
Silvia forecast that GDP growth would drop below 3 percent in the first quarter of 2006 but increase above 3 percent by the end of the year.
He also expects prices to remain under control. "I don't see a push in inflation," Silvia said. The Federal Reserve, he added, "is not panicked by inflation."
If there is one possible drag on the economy, it could be consumers.
"One component of the U.S. economy will slow down in the year ahead - consumer spending," Silvia said. But he also noted that "Consumers are wealthier today than at the height of the dot com boom."
The Fed View
Raymond Owens, a vice president and senior economist with the Federal Reserve Bank of Richmond, predicted that there would be "some moderation" of the gross domestic product in 2006. But he added that GDP growth "will still be very good in the 3 ¼ to 3 ½ percent neighborhood."
Owens added there would be strong business growth and continuing increases in new jobs. He said housing starts may slow, which would affect job growth, but "other sectors of the economy will pick up the pace."