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The Bright Spot in the Economy

By: Kari English

During the first 15 months after a recession, the U.S. economy typically grows about 4.4 percent, but following the first 15 months after the Great Recession, the economy is still only growing at a rate of about 2.1 percent, according to Joe Keating, executive vice president and chief investment officer at CenterState Bank, Winter Haven. Speaking at the Florida Bankers Association’s 125th Annual Convention in Palm Springs last month, Keating provided clues as to why the economy is moving so slowly. One source of sluggishness is housing.

“Normally, housing peaks and recovers before the rest of the economy,” Keating said.

The opposite is happening this time. The housing industry did not start recovering from the Great Recession until June 2011 — two years into the recovery — so housing starts continue to be below average.

He noted that when things are going well the average number of housing starts per year should be around 1.2 million. Before the recession housing starts were around 2 million, which he called “excessive.” Comparatively, in 2008 and 2009 housing starts were around 500,000 to 600,000.

Housing starts will approach 1 million in 2013, Keating told the Florida bankers. Housing affordability is also close to an all-time high and inventory is at a 49-year low. For these reasons he called the housing market the “bright spot” in the economy.

Keating’s outlook for the economy is that it is “slowly healing.” His major concern is how households are dealing with the payroll tax increase: by lowering their savings rates. The savings rate today is 2.3 percent and cannot go much lower, according to Keating. Therefore, the rate of consumer spending is at risk.

What Inflation?

Keating also believes inflation does not pose a risk. Inflation is running just over 1 percent currently. And the average increase in wages is about 2 percent right now. An economy cannot have inflation on 2 percent wage increases, Keating told session attendees, because no one would be able to afford anything. When wages begin increasing in larger amounts, then people need to watch inflation more closely. But even if inflation does begin, Keating believes bond traders will raise the prices of bonds significantly to make sure it does not build.

“If anything, there is more risk of deflation,” Keating said.

And because inflation is not a concern, Keating believes that is why the Federal Reserve is fully committed to the second part of its mandate: reducing unemployment. The Federal Reserve will not pull back on its current policies until it sees that jobs are self-sustaining and self-reinforcing, Keating said. He predicts the Fed will begin to reduce its bond purchases by the end of 2013.
A Plan for Uncertainty

Although Keating provided a rather optimistic view of the future of the U.S. economy, Orlando Hanselman, education programs director for risk and compliance at Fiserv, noted that, currently, insolvency is not just a European concern. In a session about strategic and capital planning, Hanselman told the audience that U.S. government gross debt as a percentage of Gross Domestic Product is close to 112 percent. Hanselman also said businesses are sitting on nearly $2 trillion in cash because of fear and uncertainty.

Click here to view photos from this convention.

In times of uncertainty, banks need to have a strategic plan, and, according to Hanselman, it should not be similar to Christopher Columbus’: When he left, he didn’t know where he was going; when he arrived, he didn’t know where he was; and when he returned, he couldn’t tell where he had been.

The CEO is at the helm of the strategy, Hanselman believes. This person should analyze, create and write a plan draft; he should gather feedback and input from executives, employee leaders and the board; he should revise the draft based on solicited input; he should finalize the plan; and then he should champion and communicate the plan to all stakeholders (the shareholders, the customers, the employees and the community).

Within the strategy should be an explanation of the bank’s competitive advantage, according to Hanselman. Many banks claim their people are their advantages, but in reality, that is probably not correct. So some other competitive advantage possibilities Hanselman suggested were delivery system, product features, quality and convenience. Hanselman noted that competing on price is the same as acknowledging the bank has no competitive advantage.

Kari English is senior editor of BankNews.

Copyright (c) July 2013 by BankNews Media