Do We Need More Stimulus?

Jason Stipp: I'm Jason Stipp from Morningstar. The Fed cast a bit of a gloom on the market this week, as it had expectations for more moderate growth of the recovery and took some steps to possibly keep interest rates lower.

Here with me to talk about where he is seeing growth right now and why we've leveled off a bit is Morningstar's Bob Johnson, director of economic analysis for Morningstar. Thanks for joining me.

Bob Johnson: Great to be here.

Stipp: First question for you. The Fed, I think did cast a little bit of a gloom on the market this week. They were starting to shift a little bit from talk of potential tightening out there in the marketplace to now they're saying well, we're not going to let our balance sheet shrink. We're going to kind of keep it the same size, we're going to maybe allow a little bit more of a stimulus out there in the economy.

Things do seem like they have slowed down, what's behind that, what factors have led us to kind of a plateau here?

Johnson: Well, I think in the overall U.S. economy, we have seen things slow up a bit. It's certainly been a little bit more dour than I would have hoped.

The consumer has probably ended up saving more money, paying down more debt than I would have expected. We've now got a savings rate of pretty close to 7%, and that's a very high number relative to recent history, when the number was down closer 1% or 2%. So, we've had a huge change in that savings rate.

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Stipp: So, one of the things, I think that we have seen is, when the consumer is spending it's a type of spending they've done isn't necessarily the type that leads to economic growth. So what do you see behind that?

Johnson: Yeah, I think what we've seen with the consumer and he has spent, although now with the latest set of revisions, he has spent a little less than we may have thought. But a lot of it's going on computers, on TVs, on iPads, on Apple products, and a lot of those things are manufactured overseas and that's causing us to have higher imports, and less of what people desire is manufactured in this country.

In past recoveries that have been driven by auto sales for various reasons, most of which end up coming out of the actual U.S. manufacturing numbers, or housing, which obviously you can't transport it and most of the lumber and so forth comes from this country, and most of the stuff that goes into a house is domestically produced.

So, you tend to – when consumers spend more, it was on goods that U.S. manufacturers produce. Now, that's having to be shared overseas.

Stipp: And one of the issues, I think that also leads to is the employment situation and certainly we've seen very, very slow improvement there over the last few months. How do you think employment is playing into this? Normally a lagging indicator, but it's certainly not helping that we're seeing such slow growth?

Johnson: Yeah. I think, we've certainly – employment is a key driver of housing and the housing is a domestic-oriented thing. So, certainly the employment not being wonderful, hasn't helped things at all.

Stipp: So can you give us the sense of how bad does it look to you right now? We have seen a slowing, but it's not like we've seen some of the levels that we saw in the depths of the crisis. Where are we right now with your take and your forecast?

Johnson: Well, at the beginning of the year, I may have been as high as 4.5% for GDP this year, and that's the broadest measure of U.S. economic growth. And I'm now thinking something closer to 3%, maybe 3.5% growth would be the number for the year and that's at the very, very high end of the range. So, we've really come down a fair amount, but it's still a positive number, and we're still seeing growth.

Stipp: Now the Fed did come out on Wednesday and did have somewhat of a quantitative easing-like policy that they weren't going to let their balance sheet shrink. So, it is a little bit of a shift in how they were thinking and maybe they saw the need to have a little bit more of a stimulus out there from their point of view. Do you think that that action is going to have an effect? And what effect it might have?

Johnson: I really don't think it's going to have a huge effect, and in fact I think it's had a slightly negative effect. I think we may have a little bit of a crisis of confidence here, and by the Fed saying, well, we're going to ease and we're going to do these weird things that maybe people don't even really understand what they are to keep interest rates low, and I think that if they're that scared, they're going to try this, that maybe I should be scared.

And I think not knowing whether I'm going to have higher health-care bills, what type of financial regulation I'm going to have, is hurting the small business attitudes, too, and so I really think we've got a crisis of confidence, more than a fact that interest rates are too high. Frankly, they can't be too high, when they are about zero.

Stipp: Is it possible that such low rates could actually be holding us back in some ways?

Johnson: Well, there was a very interesting article in today's Wall Street Journal, an editorial talking about, gee if rates are really this low, it really hurts retirees, and people really hold their spending back a little. And having rates so low, it's really not terribly helpful--we're just changing who gets the benefits here.

Stipp: So, another thing that I think this leads the question to is, we did have a rather large stimulus package last year, and now we seem to be in neutral; we're stalled. So, does that mean that the stimulus efforts that we've seen so far have failed?

Johnson: I don't think I'll go so far to say they failed. I mean we were clearly falling into the abyss in the early 2009 and they needed to do whatever they had to do to revive the economy.

Now as those things have slowly come off, things kind of slowed back up again, and it raises the question of well, if we do another stimulus, does it just goose things up for a few months and then fall back again. We'd just let kind of nature take its course here. Is that a little bit better action to take? I'd certainly think that might make more sense than the kind of go do what we just did again.

Stipp: Do you think there's any new kind of stimulus that could possibly kick start things in a different way?

Johnson: Well, there are certainly a few things that we haven't tried yet. One thing we haven't is a direct credit for hiring new employees, and of course that's hard to administer and easy to game, which has held people back from doing it.

But certainly, we're always big on giving depreciation credits and different tax breaks. And one thing that we really haven't done this time is, say okay, if you hire somebody instead of using a machine, we'll give you a credit for this. I think that's certainly something that hasn't been tried yet.

And I think there are a few things, there's some scuttlebutt around Washington around something yet new again on the mortgage front, that we find some way to forgive at least a portion of some mortgages.

Stipp: Do you think as far as your economic forecast, are you depending on any kind of additional stimulus or any kind of new stimulus, or if not, what factors do you think will start to lead us to see growth again?

Johnson: I think that stimulus or no stimulus is really not going to change my growth forecast very much. I think the greater consumer confidence and their willingness to spend is what's going to be the key driver.

And as we've said before, the auto industry has certainly gotten off its bottom, but it's been primarily through large purchases from corporations and rental car fleets, and the consumer is still relatively close to the bottom in terms of their auto spending.

And I think with new model-year cars coming out in a few months, and wear and tear on cars, that may drive the economy forward. So, I'm still looking for some stimulus from the auto industry.

Stipp: So, data seems to show that the consumer actually does have money to spend...

Johnson: He has money to spend...

Stipp: ...it's just getting them to spend it.

Johnson: Just to getting them to spend, especially on big-ticket items. I mean that's been the real problem. They're willing to spend on their computer or whatever, but just to get them to spend on big-ticket item has been very hard.

Stipp: Well, Bob thanks for joining me and thanks for your insights today.

Johnson: Great to be here.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.