Michelle Girard is a managing director and senior economist at Royal Bank of Scotland. She appears often on NBC, CNBC, Nightly Business Report, Bloomberg, and Fox News.
H.L: What does October’s 190,000 job loss total tell you in light of rising worker productivity and better retail sales?
M.G.: What we’re seeing is that businesses are not yet willing to expand payrolls. The economy has emerged from recession. Demand is beginning to pick up. But firms are meeting the increase in activity by continuing to produce more with the same workers. This is what the big jump in productivity reported last week tells us.
We think going forward it will be increasingly difficult for firms that cut payrolls so dramatically during the downturn to continue to get more from their current workforce. So we expect that as we move into 2010 we will see outright job gains.
H.L.: Is there a growing divide between Wall Street and Main Street that threatens next year’s prospects?
M.G.: Clearly the economy is in recovery. We had numerous reports last week ranging from the survey on manufacturing activity, car sales, and reports on October chain-store sales. Clearly activity is picking up. But what is not showing the same meaningful improvement yet is a strengthening in the labor market. We certainly have seen a sharp deceleration in the pace of job losses. Yet, nonetheless, job losses persist, and the unemployment rate continues to rise, and until that changes, there will be continuing concern over the outlook for consumer spending.
Ultimately, if the recovery is to be sustained and strengthened in the coming year, we need to see a healthy pace of consumer spending. In order for consumers to spend they must have income, so the job situation is absolutely critical to the outlook for the economy in 2010. If we don’t get job growth then our optimistic expectations for growth next year will need to be trimmed.
H.L.: What do you see ahead for the economy?
M.G.: For some time we have been expecting that the recovery would be stronger than most people expected, based in large part on the fact that deep and severe recessions tend to be followed by very strong recoveries. So our view has always been that in fact this would be a so-called V-shaped recovery and that growth in 2010 would approach 4 percent.
H.L.: What do you think of the return of heavy volatility in the stock market?
M.G.: There seems to be a growing number of crosscurrents in the marketplace. On the one hand you have a tremendous amount of monetary stimulus providing support to all of the financial markets, both stocks and bonds. On the other hand you have concerns that this liquidity may ultimately generate inflation, leading to much higher interest rates. You also have a mixed data picture with the economic news being generally favorable but the job situation still uncertain. And finally, the approaching year end will lead to reduced liquidity in the market, so any movements can become exaggerated.
In the bond market, for instance, market participants often try to get their portfolios in their desired positions well before the end of the year, knowing that in late December it will be difficult to get a lot done, because many players are simply not around. What we tend to see is a lot of year-end position squaring and window dressing that takes place in some cases even by the end of November, and volumes in December tend to decrease over the course of the month.
H.L.: Is the dollar as much of a dominating factor?
M.G.: You cannot ignore the weakness in the dollar. It’s sending the same signal as the rise in commodity prices and the steepness of the yield curve, namely that there is too much dollars in the system. Until the time that we begin to expect the Federal Reserve to remove some of this liquidity by either draining reserves from the system or raising interest rates, the dollar is likely to remain under pressure.
Currency is a reflection of how people view the policy mix in a country and the prospects for investing there, so the weakness in the dollar suggests that overseas investors are concerned about the Fed’s extremely accommodative stance and the large and growing budget deficit. So, the signal being sent by the weakness in the dollar shouldn’t be dismissed. There’s a reason for it, and it’s not a good reason.
H.L.: What do you think of the under-performing banks and their persistent lack of lending while using taxpayer bail-out money to buy stocks and bonds?
M.G.: They’re damned if they do and damned if they don’t. You’re right that they are buying securities in the market rather than making loans, but you don’t want banks making reckless loans to borrowers who may prove to be problematic in the future. And in a time when the economic backdrop is unclear, banks are walking a fine line.
Our expectation is that as confidence in the economic situation grows, you will see banks beginning to make more loans. But there’s no question it would be desirable for banks to be making more loans and for that liquidity to make its way through to the economy as opposed to just the financial sectors, with stocks and bonds being the primary beneficiaries so far, not the economy.
But we disagree with people who think that banks are never going to lend again. Clearly credit conditions remain tight, and that is a meaningful headwind for the economy, but we don’t believe that it will preclude an acceleration in activity next year.
