Top Economists Expect ‘Soft Landing’ in 2007

A leading state economist expects a slowdown in Tulsa’s economy. It would, however, be like a sports car gearing down from 120 to 80 mph.
In other words, the economy would still be cruising at or a little above the limit.
Mark Snead, director of the Center for Applied Economic Research at the Oklahoma State University Spears School of Business, offered a forecast during the Economic Outlook Conference, presented by the Tulsa Business Journal, on Nov. 16 at the Radisson Hotel Tulsa, 41st Street and U.S. 169.
Oklahoma has been experiencing a “mini oil boom” over the past two years, and it has driven personal income, Snead said.
Income gains have been “unusually” strong for us — 8 percent plus gains, he said.
“Historically, Oklahoma has had 5 percent gains. That figure is largely coming from oil and gas,” Snead said.
Today, Tulsa is outperforming the rest of the state, while Oklahoma City is underperforming, he said. “We saw the reverse during the slowdown,” Snead said. “Tulsa greatly underperformed while OKC outperformed.”
So, Tulsa’s recovery brings the metro area “back to normal, relative to the state,” he said.
Once the economy begins to function properly, Tulsa has the potential to create more jobs than the Oklahoma City metro area.
The economic “slowdown” is merely slipping from extraordinary to normal growth, Snead said.
“This recovery is impressive,” he said.
While the energy sector is too small to drive overall employment, it has contributed to Oklahoma City and Tulsa’s growth, he said. A concern, however, is the energy industry has reached a plateau.
“We probably will not see that same stimulus next year that we have seen in 2004, ‘05 and ‘06. I am a little concerned about that,” he said. “Tulsa is beyond its peak growth rates.”
At the same time, Tulsa is “hitting on all cylinders.”
For the prior 18 months, Tulsa has been the job growth driver in the state, Snead said.
“Today, it is difficult to know if we are doing well, or very well.”
In 2005 the state generated 1.9 percent job gains — a half-point higher than the nation’s 1.4 percent growth.
“We have been consistently outperforming the job growth, and much of the focus is on the energy economy,” Snead said.
Metro Oklahoma City continues to wrestle with manufacturing concerns — primarily over the GM plant closing.
“They will struggle as long as they are trying to absorb large (job) losses. It is likely Tulsa will continue to lead the state in job growth,” Snead said.
One big factor will be the next action by the Federal Reserve, Snead said. “The Fed will ease rates in the second half of next year, which we believe will happen. But it will not arrive until the second half and is unlikely to affect our numbers.”
Meanwhile, retails sales have been “nothing short of phenomenal,” he said.
“This year will see the fastest growth in retail sales since the oil bust,” he said, predicting an 8.5 percent to 8.7 percent growth in sales.
At the national level, the U.S. economy will soften in 2007, according to Anthony Chan, managing director and chief economist for the JPMorgan Private Client.
“I would argue that the ‘07 outlook will see softer profits and a slower economy, given the recent pace,” Chan said.
Chan agreed with Snead that the Fed was done raising rates.
“There is a 5 to 10 percent risk that the Fed will raise rates. That means there is 90 percent chance that the Fed is done,” he said.
Chan expects the Fed is likely to start lowering interest rates for next year’s fourth quarter.
“It encourages me that the housing market will slow, but will not melt down,” he said. “It will keep the economy going. I am not forecasting recession – just a small slow down.”
Lower interest rates are a possibility as the housing market continues to weaken, he said. “We have to monitor housing. If (that market) melts any further, or suffers greatly, it will determine the timetable of when the Federal Reserve moves toward lower rates.”
As the economy moderates, the Fed Reserve will not raise rates any more and will perhaps start thinking about lowering rates.
“We will have a chance at a soft landing and will not get into a recession,” he said.
The energy market has found a stable position.
“Energy prices have found a floor. And I believe that the risk is tilted to the upside slightly. Prices are near perfect,” he said
From an economic viewpoint, Chan hopes to see oil down to the $45-$50 range, “but that is unlikely.”
“I will forecast anything,” Chan said, referring to oil prices. “I can say that if there is any risk out there, it is that oil prices will move a little higher.”
As the increased geopolitical risk pushed oil prices too high, there is little or no geopolitical risk, Chan said.
“I hope and pray nothing happens. It seems that prices are on the low side. Weather will be the deciding factor,” he said.
“I can see a little rally in the natural gas markets.”
Lower energy prices will boost economic growth, he said.
Chan argues that slower growth is a positive thing.
“I would not view that as a negative thing, as the Federal Reserve would prevent itself from raising rates. It would open the door for lower rates,” he said.
“Lower economic growth would allow some of the inflationary pressures to dissipate,” he said.
Chan sees little slowdown in the Dow Jones Average — which topped 12,000 in October.
“One of the things supporting the equity markets is that interest rates have remained flat,” Chan said. He anticipates some profit taking in the stock market, but sees little slowing of the upward trend.
The conference was a forum for business leaders to share forecasts on economic trends and comments on significant issues affecting the business community.
Local business leaders will discuss specific Tulsa economic sectors in construction / real estate, aviation / aerospace, energy services, retail, hospitality, manufacturing, health care and technology.
Chan provides economic analysis and research while making client presentations. He is a member of the Blue Chip Monthly Forecasting panel, as well as the National Association of Business Economists Quarterly Macro Panel, The Reuters, Bloomberg and Dow Jones Weekly Economic Indicator panels.
The Tulsa Metro Chamber partnered with OSU’s Spears School of Business to host the conference in its ninth year. ?

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