Wells Fargo: Economy mending, but slowly

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Scott Anderson, Wells Fargo senior economist.

The economy – both nationally and locally – is on a slow mend, but no economist in the world is ready to proclaim “mission accomplished,” said a senior economist for Wells Fargo.

Still, there seems to be a bit more optimism in the air and no one wants to crush that either.

“What I’m seeing is people are looking at it as the glass half full,” said Scott Anderson, Wells Fargo director and senior economist. “There is a sense that we cannot live in fear forever.”

Anderson was in Colorado Springs Thursday and spoke to Colorado Springs bankers, developers and small business owners at the Wells Fargo economic forum. Anderson, who is based in Minneapolis, is responsible for the analysis and forecasting of international, national and regional economic trends.

The economy is about half way through its recovery – three years into what typically takes about seven years, he said.

There are some positive signs in the economy to cheer. The Labor Department reported this week that the number of U.S. workers filing new applications — 365,000 — for unemployment benefits fell to its lowest level in a month, down 27,000. Part of the improved job picture, Anderson said, is small businesses have more cash flow and are willing to hire.

The housing market seems to be percolating a little stronger too, he said. And, U.S. businesses are stronger than he has seen in recent years, with record high levels of profitability — domestic U.S. profit margins stands 50 percent above its long-term average.

One of the strongest rebounds is in manufacturing. Growth among U.S. manufacturers expanded in April at the fastest pace in 10 months, according to the Institute for Supply Management survey of senior executives, released this week. The manufacturing sector rose to 54.8 percent from 53.4 percent in March, the highest since June 2011.

Readings over 50 percent indicate that factories are expanding.

In Colorado, metal manufactures are doing well and construction activity is improving, said Ernie Goss, director of the Goss Institute for Economic Research, which released its monthly report of the business climate this week. The metal manufacturers in Colorado are experiencing healthy growth stemming from international markets, the report said.

Economists predict the U.S. unemployment rate will drop to 8 percent by the end of the year, Anderson said. But, those numbers could be a false signal because, he said, there are more jobless people in the United States than most people realize. As many as nine million people left the labor force last year – which if added to the count, unemployment would be closer to 10 percent.

In El Paso County, local economists have estimated 24,000 discouraged workers who have dropped out of the labor force, which means the county’s unemployment rate, could be closer to 15.5 percent, according to the Southern Colorado Economic Forum’s annual report.

U.S. businesses will likely create 2 million jobs this year. But, that is still 4 million short of 2007 levels, Anderson said.

“Businesses are still cautious and not putting all bets on the table,” he said.

It’s a real dicey time to forecasting the economy, Anderson said. The uncertainty has caused a decline in consumer confidence. It’s meant banks are holding on to cash. And, it has everyone just best-guessing over what will happen with the Presidential election, the debt ceiling and tax programs.

“We are cautioning our clients to be realistic,” he said. “We are still one step forward, two steps back.”

Economists knew the recovery would be slogging. And, while the U.S. is showing signs of rebound, Europe has gone back into recession – an important issue when about 20 percent of the U.S. exports head to Europe. European governments have infused trillions into the banks, but no one can say for sure if it will solve the economic problems. Spain’s unemployment rate, for example, is 50 percent.

“There is a chance, Europe’s recession could be deeper and more prolonged,” Anderson said.

In the U.S. it’s costing more to live – fuel prices are up; rents are up – and that puts a bigger dent in the consumer’s pocket book. It has them dipping into savings accounts and taking on more debt, including buying new cars that they had put off for the past few years.

The gap between spending and income worries economists. People used to have a savings rate of 6 percent. Now, its 3.7 percent, Anderson said.

But, economists are divided on how the economy can be fixed. Some have a wait-and-see attitude; others, including Ben Bernanke, the Federal Reserve Chairman, want to continue programs like “Operation Twist,” where the Fed sells its shorter-dated debt and buys longer-debt in hopes of driving down borrowing rates.

Meanwhile, the Fed has pumped about $2 trillion into the banking system and that money is not circulating, Anderson said.

“What gets the Fed nervous is that they look at that and see banks are not as integrated into the recovery as they could be,” he said. “The money isn’t circulating in the economy.”

And, then there is the “fiscal cliff” that awaits America, Anderson said. At the end of this year, a range of tax cuts will expire, including the Bush-era tax rates on personal income, capital gains, and dividends and a payroll-tax reduction. When the taxes expire, it could really put a halt on consumer spending, Anderson said.

Economists are reluctant to predict doom and gloom about the taxes, he said, because they are hopeful that the government will extend them.