The Economy and U.S.: Insight from Anirban Basu – Part 1
Late last week Kathy Krach, the strategic marketing analyst for MacRo, Ltd., Real Estate Services, had the opportunity to interview renowned economist Anirban Basu, chairman and CEO of Sage Policy Group, Inc.
Named by The Baltimore Business Journal as one of the region’s 20 most powerful business leaders in 2010, Mr. Basu is a trusted advisor to numerous business associations and private corporations and ventures throughout the mid-Atlantic states.
This two part article brings into focus Mr. Basu's "take" on the state of the U.S. and global economies, and the impact that they have on Maryland, including Frederick County.
As the 2012 presidential election draws near, voters seem to be looking past the traditional sideshows of political mudslinging and placing a stronger focus on the state of the economy and how it is impacting their careers, personal lifestyles ... and their pocketbooks.
The June 8, 2012, Kiplinger Washington Letter stated that while recent reposts of "ebbing job creation" are very disappointing, "other economic signals are more positive [with increasing] business and consumer confidence, retail spending and factory orders."
Kevin Thorpe, chief economist with the national commercial real estate firm of Cassidy Turley in its U.S. Macro Update for June 2012, echoes similar views: "Job growth is slowing, even the recent numbers are far from a level that would indicate the recovery is falling apart," making the nation's GDP [gross domestic product] on track for a less than modest 2% increase this year.
However the update states that within the same week that dismal May employment figures were released, other reports showed that "construction spending is still rising, the U.S. manufacturing sector still expanding, and consumer spending is still growing modestly."
All that stated, it seems that the instability in the Eurozone, along with indecisiveness and gridlock in our nation's capital, is playing a significant role in a recovery that seems to suffer from a failure to launch.
So, we asked for some "sage" advice from Mr. Basu.
Ms. Krach: Has the U.S. economy hit another economic hiccup after robust job reports in February and March?
Mr. Basu: The slow-down in jobs growth was more than a small hiccup – we went from 220,000 jobs added per month to 80,000 – a huge sign that uncertainty over the Euro crisis and the U.S. budget is now having a major economic impact.
The Euro crisis has evolved into a social and political crisis, and resolve is weakening to adopt austerity measures there – as evidenced by recent elections in Greece and France. As a result, many European countries will not meet debt reduction plans, and this crisis is going to drag on.
Additionally … both national and multinational banks on the Eurozone periphery have large exposures to private debt. If efforts to capitalize these banks are unsuccessful, then Euro countries may be forced to submit to a strict austerity program prescribed by the European Central Bank (ECB) or even the International Monetary Fund (IMF).
At this point, the most obvious source of capital infusions into the IMF is China and the Middle East – they have plenty of money and very little debt. Having capital when the world is starving for it … is power. Those with money establish the terms for those in need: either through interest payments, or less tangible terms.
Ms. Krach: Given that it is unlikely that Congress will act on the budget before the election, does that mean the U.S. economy will be in this stall until then?
Mr. Basu: No. Congress could push back the automatic sequestration mandated by the Budget Control Act of 2011 by another year, or find other ways to cut the budget that make sequestration unnecessary. Congress has power over these decisions, including the expiring Bush tax cuts and the payroll tax cuts, which would increase taxes significantly.
The problem is Congress won’t tell us what [it is] going to do. We are only six months out from 2013 and major changes are possible in Washington government spending and taxes. When people are forced to speculate, they take a “wait and see” approach.
The re-emergence of profound economic weakness may accelerate congressional action.
Ms. Krach: So, overall, what is your expectation for 2013?
Mr. Basu: It’s impossible to tell. In addition to the Euro crisis and the U.S. budget crisis, there are so many black swan threats right now: tension between Iran and Israel, the fact that Iran could unilaterally jar the energy market, Korea’s young leader and nuclear power, instability in Russia. The U.S. economy is susceptible to any of these issues.
The good news is that we have a very resilient economy. As devastating as 9/11 was, we were out of recession in about 1½ years. When Lehman Brothers failed in 2008, we were out of recession by 2009.
It all hinges on how the uncertainties resolve and whether any of these threats materialize. If we get Congress resolved and Iran stabilized, the economy could be booming in 2013. On the other hand…
That "other hand" is 50% of the human equation. It was poet Robert Browning who said: “There are those who believe something, and therefore will tolerate nothing; and on the other hand, those who tolerate everything, because they believe nothing.”
With the world economy in the hands of so many, it may very well be that even if the 50% who believe nothing and keep their heads in the sand, it may very well be that it all comes down to the wire …
Now, where is that wire, anyway?
In Part Two of our interview with Anirban Basu, we put sharper focus on the economic state of the State of Maryland and its largest geographic area – Frederick County.
Rocky Mackintosh is the owner of a land and commercial real estate firm based in Frederick. He is also the editor of the MacRo Report Blog.