Comerica economist: Strong manufacturing, housing resurgence reasons for optimism over economy

Posted on March 14, 2013

The chief economist at Comerica Bank gave an upbeat prediction for the national economy Wednesday at the bank’s annual economic luncheon.

Although Robert Dye’s speech at the Detroit Athletic Club was titled “Beyond the Fiscal Cliff: A Rocky Road Ahead,” it presented more reasons for optimism than for worry.

“Recent U.S. data is mixed to up. … There’s a lot of upside,” Dye said.

While fourth-quarter growth in gross domestic product was weak with a rate of 0.1 percent, February employment numbers were strong, with a gain of 236,000 jobs. Dye predicted the rate of unemployment would continue to sustain its improvement, auto sales will continue to increase, and the housing market will continue its resurgence.

“If we stay north of 200,000 jobs, this will start feeling like a very different economy,” he said.

Dye said other reasons for optimism include ongoing strength in manufacturing and a sharp decline in home-related debt that will support consumer spending in general and allow more debt for auto purchasing, in particular.

But while new-car sales will continue to rise, the rate of growth will slow substantially, ending a recent trend of both the Detroit-area economy and Michigan economy outperforming the national economy.

Dye said auto sales have gone from 9 million a year at the bottom of the recession to 15 million, “and now we’ll go from 15 million to 17 million. There will be substantially weaker job growth locally. Weaker growth, not job losses,” he said.

As for housing, Dye said: “There’s been so much lift that in much of the country, inventory is getting tight — just a four-month supply. And we’ll see more lift in new housing.”

Dye said housing starts are at a pace of 900,000 annually with a market need of about 1.2 million. “So there’s a lot of upside,” he said. “We can get north of 1.5 million and sustain that for a number of years.”

Longer term, Dye said, the U.S. must eliminate the gap between spending and tax revenue.

At the bottom of the recession, federal spending was about 25.5 percent of national GDP, with federal receipts less than 15 percent. Today, that gap has narrowed, with spending at less than 23 percent and receipts at 16 percent.

Dye said the consensus among economists is that those numbers should equalize at about 19.5 percent. Instead, Without further federal action to close tax loopholes and reduce entitlements, Dye said, the gap between outlay and income will continue to shrink until about 2016 and then start widening again, he said.

Dye predicted Congress this year will cut entitlements while raising taxes buy cutting some loopholes.

“Nominal tax rates will go down, and we’ll collect a lot more in taxes,” he said. “That’s how it’s going to work.”

Dye said other worries about Washington policy are that the debt ceiling keeps getting kicked down the road, health care costs need more reigning in, and long-term cuts in entitlements remain elusive.

“There is no doubt that uncertainty … is having a dampening effect on the economy,” Dye said.

Dennis Johnson, one of Comerica’s senior vice presidents and its chief investment officer, told the audience that national and world equity markets will continue to do well in 2013 and that the bank’s investment committee decided last September to increase exposure to foreign equity markets.

Johnson said that public companies are reporting record profits but that the driver behind rising equity prices won’t be bottom-line performance but the vast amounts of money leaving bond and U.S. Treasury markets in search of higher yields.

He said stocks usually trade at a ratio of about 16 times price to earnings. U.S. equities now have P/E ratio of about 14 times, with international equities about 12.5 to 13 — another reason to expect stock prices to continue to rise.

Johnson said he favors investments in commercial real estate and housing, and in oil and gold, now that the latter has had a falloff from record highs and the world economy shows signs of being less volatile, with fears of a hard crash in Asia and a depression in Europe having eased.

He said that contrary to popular opinion, the time to invest in oil and gold is not at times of high volatility but in times of relative calm. “I’d rather buy low,” Johnson said.

Tom Henderson, Crain’s Detroit Business.