Recession Unlikely Until Next Year, Economist Says


The Business School

The economy and stock market have been on “Mr. Toad’s Wild Ride,” but the U.S. economy can handle the bumps without going into a recession until at least 2017, according to Karin Kimbrough, a managing director and economist at Bank of America Merrill Lynch in New York City. 
“The U.S. is just too solid,” she told a packed house at Economic Forecast ’16, which was held at The Beechwood Inn in Worcester by the Worcester Business Journal. The Foisie School of Business and Bank of America Merrill Lynch were presenting sponsors. Three area business executives joined Kimbrough in providing economic forecasts. 
While she believes the U.S. economy is solid, manufacturing is already in a recession. But the recession in manufacturing won't have as big of an impact on the economy as a whole as it would have in the past, according to Kimbrough, because manufacturing isn’t as big as it used to be. Manufacturing has fallen from 30 percent of national output to 12 percent, so a recession in manufacturing is no longer a predictor of a recession throughout the economy.


The Federal Reserve Board, which has been seeking to boost the economy by keeping interest rates close to zero for the past seven years “has made things a little worse,” she says, adding that she is a former Fed economist. When the Fed elected in September to keep interest rates at zero, waiting instead until December to increase them, investors focused their attention on China.
“Because of China,” she says, “we got nervous.”
While China has been devaluing the yuan, last fall it devalued its currency more than it had in the past and, Kimbrough says, “it was a mess. It spooked a lot of people.” Because of a lack of transparency in China, the value of the yuan is one of the few economic indicators investors can trust, so they became too focused on it.
China’s actions, according to Kimbrough, are based not on slowing growth, but on its attempts to make a transition to a consumption-based, service-based economy.
“China ultimately wants to be where we are,” she says. “They wants a global currency. They want a deep and liquid bond market. They want the ability to issue debt in their own currency.”
While China’s devaluation has had a greater impact on the U.S. stock market than it should have, Kimbrough is not concerned about its long-term impact.
“Some believe China is so big, it can drag us down,” she says. “I disagree.”
China’s $11 trillion economy is the second largest in the world, but the U.S. has a $19 trillion economy. And, she adds, ties between the U.S. and China are not significant to the bond and equity markets, so “the channels of contagion are relatively narrow.”
While she notes that her firm projects that the odds of a recession this year have increased from 15 percent at the beginning of the year to 25 percent today, she’s optimistic. Consumer spending drives 60 percent of the economy and consumers continue to deliver, even while saving more and reducing their level of debt. In addition, the U.S. is attracting significant global capital, in spite of a less-than-stellar economy, she says, because “it’s the best game in town.”
Kimbrough added that the housing market is beginning to recover as millennials begin to start families and buy homes, but housing prices have softened in New England. While housing prices are increasing at a slower rate, wages are higher in Massachusetts than in most other parts of the country, making housing more affordable.


Frederick Eppinger, president and CEO of Hanover Insurance Group of Worcester, was also guardedly optimistic about the economy, saying, “We’re tepid, but we’re solid.”
“It’s a little harder to grow, to compete,” according to Eppinger. “There’s less growth and where there’s more demand, it’s demand from people who are particular about what they want.”
While the unemployment rate has fallen, he says, underemployment is high, as many people are working in lower-paying or part-time jobs. In the construction industry, he adds, “we’re still about a million jobs short of where we were” before the Great Recession.
Conversely, Eppinger says there have been plenty of promising developments, including the advent of the on-demand economy created by companies such as Airbnb, Lyft, and Uber.
“It means more independent contractors and higher earning potential,” according to Eppinger. “It’s not going away. The amount of venture money in it is outrageous.”
Eppinger is especially bullish about the Worcester economy. General Electric is moving to Massachusetts, he says, because “the talent attached to our geography is intense.”
While the Massachusetts economy is attractive, the high costs of housing and healthcare are holding the economy back.
“The solution is Worcester,” he says, as it costs significantly less to live here than it does to live in Boston.
Another advantage of Massachusetts is its “energy ecosystem,” which is “ahead of the rest of the country,” according to Joseph DeManche, executive vice president of Amaresco, an energy services company based in Framingham, Mass. The use of wireless-sensor networks, LED lighting, smart devices, and less centralization help increase energy efficiency and reduce costs, according to DeManche.
The energy ecosystem is another reason GE chose to relocate to Massachusetts, he adds.
David Siegel, vice president of sales and marketing at Stop & Shop, the Quincy, Mass., grocery chain, says his company has grown to become the largest chain in the northeast as it celebrates its 100th anniversary. The completion of a planned merger would make it the largest chain on the east coast and the third largest in the country.