Federal actions are doing little to stimulate a sluggish economy, says a Wells Fargo economist.
High unemployment cannot be reversed by fiscal policy or changes to the tax code, Mark Vitner told 140 local business and community leaders at his annual economic forecast on Wednesday in Rock Hill.
Investment in people or new business or reinvestment in current operations won’t come until there is more certainty in tax codes and regulations, he said. Businesses need to know what an investment yields in three, four years and not be wondering how they’ll be taxed then, Vitner said.
He predicted a growth rate of 2 percent through 2015 – barely enough to keep unemployment from rising. He said the chance of another recession is one in three, up from last year’s prediction of one in four.
Such slow growth leaves little room for error, Vitner said.
There is good news locally. York County has recovered almost 99 percent of the jobs it lost because of the recession that started in 2008.
“Local businesses should not wait for things to get better,” Vitner said. “They have to think hard and make things work in this environment. York County is a good place to be.”
Vitner is a managing director and senior economist at Wells Fargo based in Charlotte. He tracks U.S. and regional economic trends. His economic outlook breakfast has been a must-attend event for a number of years. This was the first year the event was held at Winthrop University.
High fixed costs
“Employment can’t be done with fiscal policy,” Vitner said. The reasons employers are not hiring is high fixed costs for health care and benefits, worker training and equipment and the cost to meet federal mandates.
The cost of benefits is accelerating twice as fast as the cost of wages and salaries, according to a Wells Fargo analysis.
“There is room to increase worker hours before increasing employment,” Vitner said.
Unemployment is primarily an educational issue, he said. People need to keep learning.
“Finding a job seems overwhelming to people,” he said. “They need to keep it simple; what three things can I do to improve my employability. Maybe it’s lose weight, build confidence, become a better public speaker, things that don’t require formal education. Tackle the small things.”
People with a high school education or less have been disproportionally affected by the recession, he said.
“The income divide can be fixed with education. Monkeying with the tax code won’t address that,” Vitner said.
Economic recovery won’t happen until the housing market rebounds, he said. Adding to the slow market is the negotiations over the “robo-signing” controversy where banks made loans without checking all the paperwork. As a result of these negotiations, banks are reluctant to foreclose on properties, Vitner said – even in cases where people haven’t made payments in two years.
In York County, home prices have returned to 2006 levels, but home construction remains weak, he said. The number of building permits is at 1997-1998 levels.
In Lancaster County, home prices have returned to 2005 levels and building permits have just begun to recover, according to a Wells Fargo analysis.
For those who qualify to refinance their house, rates are at a historic low. “Money is for sale if you have good credit,” Vitner said.
The Fed acts
Actions by the Federal Reserve on Wednesday may also drive rates lower. The Federal Reserve decided to buy $400 billion in longer-term Treasury notes while selling notes with a maturity of three years or less. This should be a downward pressure on interest rates, the Federal Reserve said.
The Federal Reserve also said it would put more money into mortgage-backed securities, a move Vitner said should do more to lower interest rates than the purchase of longer-term Treasury notes.
At its August policy meeting, the Federal Reserve said the economy likely would struggle for at least two more years. As a result, it said it planned to keep short-term rates near record lows until mid-2013, as long as the economy remained weak.
Before Wednesday’s actions by the Federal Reserve, Wells Fargo was predicting interest rates would drop to 3.8 percent on conventional mortgages by the beginning of 2012.
By Don Worthington, Staff Reporter with The Herald
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