Economist Delivers Cautiously Optimistic Growth Forecast

Economist Delivers Cautiously Optimistic Growth Forecast

Photo by JEFF TAYLOR/The Winchester Star
Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, speaks in the Stimpson Auditorium at Shenandoah University on Tuesday. Lacker predicts moderate growth in the economy for this year.

The president of the Federal Reserve Bank in Richmond told a gathering of business leaders and students at Shenandoah University on Tuesday that he predicts more modest economic growth for this year than many other economists.

But Jeffrey Lacker ended his presentation at Stimpson Auditorium on a more optimistic note.

“Our economy is by no means stagnating,” he said. “Productivity is increasing. Innovations are occurring. Incomes are growing.

“Looking at everything as a whole, I think that I have a fundamentally optimistic view about our future.”

The Harry F. Byrd Jr. School of Business brought Lacker to the university.

Besides the Board of Governors in Washington, D.C., there are 12 Reserve Banks nationwide, Lacker said.

The Federal Reserve has several roles, according to its website,, including leading the U.S.’s “monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates,” “supervising and regulating” banks and “maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.”

With the start of a new year, economists are often asked to give their projections for the upcoming months.

Because the second-half real gross domestic product (the market value of goods and services produced by labor and property) at the end of last year was stronger than it had been in quite some time, some economists are predicting GDP growth of 3 percent this year, up from the roughly 2 percent growth it’s been of late, Lacker said.

That’s what they have been saying since recovery from the Great Recession of 2008 and the first half of 2009 began, though, he said.

“But, despite those hopes, the actual results have certainly disappointed economists over this period,” Lacker said.

For the first half of last year, the GDP was only up by about 1.8 percent. That leads Lacker to have a more “cautious attitude” towards the economic outlook.

During what is referred to as the Great Moderation — 1983-2007 — real GDP grew on average 3.3 percent a year, he said. That was matched by the same growth in real personal income, with consumer spending increasing 3.6 percent each year.

While the median forecast for consumer spending — which is closely linked to GDP — among economists for 2014 is about 2.75 percent, Lacker is predicting a more conservative 2-2.25 percent.

The Great Recession brought with it several negatives: the GDP went down 4.3 percent, 8.7 million jobs were lost, unemployment went from less than 5 percent to 10 percent, real personal income dropped 3.1 percent, household holdings of mutual fund and stock shares dropped by $5 trillion, and household real estate equity dropped nearly $4 trillion, Lacker said.

“The scale and scope of the loss of income and wealth by American households during that period was far greater than anything they had seen in the past 20 years,” he said. “Lenders are bound to re-evaluate the riskiness associated with extending credit to a typical American household.”

Likewise, consumers are also working hard to pay down debt and save money.

All this factors into consumers spending more cautiously. Real consumer spending has gone up only 2.1 percent a year for the past three years, according to Lacker.

“Businesses also appear to be quite reticent to invest and hire,” he said. “When small businesses were asked the single most important problem they face in the latest survey, 20 percent cited government regulations and red tape.”

On the government side, Lacker is concerned that the recent decline in the deficit could lessen the urgency felt about getting the federal fiscal house in order.

The sector seeing strong growth, housing, accounts for only 3 percent of the GDP, Lacker said. It was up 15 percent in 2012, and 6.3 percent in 2013. Lacker expects the upward trend to continue.

Consumer spending and business investment, on the other hand, make up 80 percent of the economy, he said.

Progress is being made, however, Lacker said.

“Things are moving forward,” he said. “We would like them to move more rapidly, but that’s just how it’s been.”

The Federal Reserve president also discussed the jobs market. While employment went up about 1.8 percent a year from 1983-2000, in the past four years, it’s only grown 1.2 percent a year, a 30 percent drop.

Lacker partially attributed this to baby boomers moving into retirement. There is also a disparity between the job skills needed for positions and the available workforce.

At the height of the recession, the Fed brought the targeted federal funds rate (the interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight) down to about zero, which was appropriate, Lacker said. Since then, the Fed has purchased a large quantity of assets, increasing the supply of reserve account assets and possibly having a stimulative effect. It hasn’t been as stimulative as expected, however, Lacker said.

The Fed’s assets have increased from less than $1 trillion to about $4 trillion, going up by about $85 billion monthly in 2013. That was reduced to $75 billion in December, and starting last week, to $65 billion a month, according to Lacker.

Several people in the audience had the chance to ask Lacker questions.

One man asked about people who are underemployed, working beneath their skill levels.

Lacker responded it’s very difficult to get a handle on the number of people working jobs for which they’re overqualified.

Another man was concerned about the low rate of return on money market accounts, savings accounts and certificates of deposit, and the effect on seniors.

That has been discussed at length at the Federal Reserve, Lacker responded. He said it was an unfortunate consequence of the current conditions, and was impacting those on fixed incomes relying on their portfolio. He warned older Americans to beware of taking more risks.

“You’re not going to get a high yield without taking on more risk,” Lacker said. “I’m afraid I don’t have a remedy for you.”

Lacker also discussed income disparity.

“It’s true that the distribution of income across Americans has widened in recent years,” Lacker said. “This has been going on since the 1970s.”

As better technologies have been implemented since the 1970s, productivity of highly skilled workers has increased more rapidly than among lower-skilled ones, he said. Changes to the educational system need to be made to address the issue.

In a media gathering after his presentation, Lacker said that while the Federal Reserve Open Market Committee is always cognizant of global economic conditions and developments, how other economies handle their policies is their choice.

“We [conduct] policy to achieve a price stability and maximum employment here in the United States,” he said.

Recent stock market drops can be explained by investors extrapolating the early first-quarter growth and revising down how much momentum will carry through the second half of the quarter.

“We’re still at a great stock market looking back over the last year,” Lacker said.

The business school was excited and honored to bring Lacker to Winchester, Dean Miles Davis said.

“It’s important for the community as well as students [to] have a chance to hear things from an authoritative source,” he said after the presentation. “There’s so many talking heads on television, on blogs talking about what’s going on in our economy.

“The role of a university as a place of learning and education is not just for students. It’s a resource for the community, and the Byrd School of Business takes that seriously. The economy impacts everybody’s lives.”

— Contact Sally Voth at

By SALLY VOTH The Winchester Star