J.P. Morgan’s Bruce Kasman on the U.S.
How do you see the U.S. economy from now through next year?
As we turn into the fourth quarter, the economy is showing I think more strength than we had expected. What is interesting is as we are picking up some steam, some of the things that hurt us earlier in the year were temporary drags, while we are now obviously facing a new set of drags, mostly emanating from Europe. And we also have this uncertainty about where U.S. fiscal policy is heading.
Do you think that labor has been pushed aside by technological progress, and corporate profits will forever be stronger?
I’m not sure I buy that. In the early stages of this recovery, corporates used every effort they could to get productivity gains and not meet demand with extra labor. That was normal behavior. I think that was changing as we went into this year. Private payrolls did not weaken nearly as much as you might have thought. At the same time, we have a government sector, which is a fifth of the labor force and which is continuing to shed workers. The other thing is we have an economy that is not generating that much demand. If we get 3 percent growth for the third quarter, I think we will get 150,000 to 175,000 private payrolls. Obviously with the unemployment rate where it is, we are not going to get the utilization of labor up anywhere near where we would like it to be.
What happens to U.S. growth if Europe slips into a recession?
The U.S. is sensitive to Europe, but I do not think the U.S. is critically dependent on Europe for its growth. I think Europe is a piece of the story, and unless they really mismanage and create a true global financial event here, I think the European recession will have impact on the U.S. but it will not be dominant in terms of U.S. performance in the next few quarters.
You see 3 percent growth for the third quarter. Take us through to this time next year.
So much depends on policy. If we don’t change the fiscal path we are on and we allow all the tax cuts to expire and the other spending to expire, we will have the economy skirt recession but grow at something like a 1 percent pace. And then where we are next year I think depends a lot on how Europe manages its problems. If we can avoid the fiscal tightening, if we can kind of switch from having near-term tightening to more medium-term adjustments and keep fiscal policy neutral, I think the economy could do O.K. here—I would say 2 percent, 2.5 percent growth.
Do we need an investment policy to generate jobs?
We need to make sure fiscal policy is not hurting demand in the next few quarters, and right now it is scheduled to do so. I think we need credible adjustments in the more medium term, and obviously the supercommittee has the opportunity to deal with that. And I think we would like to see policies geared toward structural growth improvements here. There are definitely things that can be done here both in terms of the tax code as well as on the spending side that would be favorable, although I do not think anything here is an immediate boost in terms of significant size. This is not going to be an economy that is going to get back to normal unemployment rates anytime soon. I am not optimistic. Our basic mantra right now is, yes, we can, no, we won’t.
How do we jump-start investment?
The point to make is that we have had good investment. Obviously, investment in real estate and structures have been hurt. But equipment and software spending has been averaging double-digit gains for the last two years. We are running the best recovery in terms of capital spending since the early 1980s. So there is strength in that area. I think the problem in the economy right now is tied to real estate and consumers, who I think are in the midst of post-traumatic stress disorder coming out of this very bad event. And those are difficult things to come back from very quickly. I do not have any policy ideas that are going to dramatically change the healing process in the housing market.