Economist: Interest rates to start climbing by mid-2015

A national economist, who was the guest speaker at the 2014 Housing Outlook hosted by the Home Builders Association of Greater Springfield and the Greater Springfield Board of Realtors, said he expects interest rates to start climbing by mid-2015.

Elliot Eisenberg, a former senior economist with the National Association of Home Builders and a national speaker who runs Maryland-based GraphsandLaughs LLC, said both public- and private-sector spending is expected to increase next year, tipping the scales for the board of governors of the Federal Reserve System in favor of raising interest rates.

The bow-tied Eisenberg, who frequently darted through rows of tables and interacted with the audience of around 80 attendees in the Illinois Room at University Plaza Hotel and Convention Center, said those with money – particularly business owners – are on the verge of spending it. Throughout the recession and in the years that followed, business owners largely have been waiting to invest in expansion – until now, he said. As they increasingly move to build new production facilities and hire workers over the next year, Eisenberg said the climate would be ideal for interest rate hikes.

The Federal Reserve is expected to raise interest rates slowly, over the next three years, beginning around June 2015, according to Eisenberg’s projections. He said there is currently a great debate between two camps of economists whom Eisenberg described as “hawks and doves.” Generally speaking, hawks are ready to raise interest rates now to fight inflation, while doves are slower to act and want to see more wage gains and lower unemployment before increasing rates.

“The Fed says they want 2 percent inflation. That’s their Goldilocks level they want to achieve. They want monetary policy to get us to a point of consistent 2 percent inflation,” Eisenberg said, pointing to a slide of 2014 Consumer Price Index monthly data of just above 2 percent. “This suggests we’re already there. But we’re not there because the Fed doesn’t look at this measure of inflation. They look at the personal consumption expenditures, and it is substantially lower at about 1.5 percent.”

He described Federal Reserve Board Chairwoman Janet Yellen as a dove, given her cautious approach with raising interest rates.

Even so, he expects the Fed will raise rates by up to 1 percent through the end of 2015 and up to as much as 3.5 percent by the end of 2017.

“It’s going to start in June, maybe a little earlier if the economy is good, but I don’t think so,” Eisenberg said. “The economy really is getting better. You may not feel it or see it, but things slowly are improving across the board in many areas.”

He said no federal spending cuts, no new taxes and no sequestration in 2014 are all positive signs coming out of Washington, D.C. Citing various sources, including the U.S. Bureau of Labor Statistics, he said state and local governments are beginning to hire again, and manufacturing production capacity and corporate savings would propel the recently fragile economy forward.

“The federal government is going to be less contractionary, state and local governments are going to be expansionary, so the public sector is going to be doing more for us than it has been for a good, long time,” Eisenberg said. “Corporations have trillions of bucks in their reserves that they’re not spending. … But because they’re not building many plants or investing in equipment and employees, labor productivity has gone way down. But it can’t persist. Why can’t it persist? It can’t persist because we’re making more stuff than ever before.

“Labor productivity growth is as low as it’s ever been and we’re running out of capacity.”

Not all the data was rosy, however. The labor participation rate is around 63 percent now, according to the economist, which compares to roughly 67 percent in 2000. He said more baby boomers retiring is part of the picture, but wage growth over the last few decades for all but the top 20 percent of wage earners has been almost nil, providing less incentive for many to work.

Tom Little, a corporate credit manager for Hermann Lumber Co., said he liked what Eisenberg had to say about the labor market.

“I agreed with him that things are improving, but we’re not seeing the effect. I absolutely agreed that the reason we’re not seeing the effect is because of the job market,” Little said. “Too many people are quitting work or collecting unemployment or retiring.”

In his eight years with Hermann Lumber, Little said the wage increases he’s seen haven’t been enough to cancel out the increases he’s experienced with health care coverage costs.

“I’m taking home less than I was eight years ago,” Little said.  

Jami Wightman, owner of Nixa-based concrete company Wightman Construction LLC, said she felt the fast-talking Eisenberg largely missed the mark when it came to delivering data that spoke to her.

“A lot of it was helpful, but much of it was so high-level that I don’t think it was applicable to the audience here,” Wightman said. “In our business, it’s hard finding qualified employees that want to work.”

Eisenberg included in his presentation Springfield-area housing impact data from 2010 that he helped compile while he was still with the NAHB. He had visited Springfield as the keynote speaker for the 2011 Housing Outlook.

The 938 homes built within the five-county Springfield metropolitan statistical area in 2010 created ripples of economic activity that he said far outlast the initial construction. That year’s activity was projected to generate more than $150 million in income and local taxes for the area economy over the life of the home.

He said there are three phases of economic activity born from a home’s construction: construction, ripple and occupancy.

“The construction phase is where you bring people in who buy ditch witches and lumber and that kind of stuff. There is all this economic activity going on, and it’s very exciting. That lasts eight or nine months, and then it ends because the home is built. But every two weeks while you’re building the house, I’m paying my subcontractors like you. I pay you and then you spend money. That’s the ripple effect,” Eisenberg said. “Once the household moves in – someone like you – you pay utilities and taxes, water taxes, gas taxes. … That’s the occupancy phase, and it goes on forever.”

During the construction phase, Eisenberg’s 2010 study estimated the homes built generated $87.3 million locally, supporting 1,554 jobs. The ripple effect of those earnings and collected taxes would produce roughly $41 million. And through the lifetime of the homes, $23.3 million a year is expected to trickle into the economy from occupants.

The 2014 Housing Outlook did not commission a similar survey.

Little said he was impressed by the housing impact data, even though he was a little skeptical.

“I don’t know if it’s really that much, but I don’t have a reason to say that,” he said.[[In-content Ad]]