in-depth treatment

GlobeSt.com: How long will this Goldilocks economy last?

Behravesh: It could go on for another year or two. The risk further out is if we continue to grow as strongly as we think we might, especially if the jobs market is as strong as it seems to be.

GlobeSt.com: That's bad thing?

Behravesh: Well, then the risk of course is that we have more wage inflation and eventually more price inflation. These inflationary pressures, if they emerge, will probably emerge next year.

GlobeSt.com: Are those the prime foreseeable risks?

Behravesh: At this point it certainly seems that the risks of a sharper downturn are receding while the potential risk of inflation is still out there. So I think the Fed is right to be somewhat hawkish on the inflation front. The risks are definitely on the upside.

GlobeSt.com: How cyclical is the economy?

Behravesh: It's a very good question. If you look over the past 20 years, you observe a few things. The first is that inflation is a lot lower and less volatile than it used to be, say, 25 years ago. As a result, interest rates, especially long-term interest rates, are considerably lower and somewhat less volatile than they were in the '70s and '80s. Accompanying that has also been business cycles that, while they are not relegated to the trash heap of history, are much less pronounced, at least through the last couple of US and global recessions. However, there seems to be more volatility in the asset markets. So we have big swings in exchange rates and stock prices and home prices. We have this funny irony where the lower interest-rate pattern that we've had over the past few years has fueled bubbles of all kinds.

GlobeSt.com: You said at the presentation that bond markets got the economic outlook wrong and the stock market got it right. Yet, in our industry, the trend has been out of stocks and into real estate. Explain the disparity.

Behravesh: The bond markets--the treasury markets, actually--had priced in a significant slowdown in the US economy. The stock market, especially in the second half, was doing much better and was much more upbeat. I wasn't making a judgment about rates of return, because you're right. There are a lot of other areas, like private equity, that have done even better than the stock market.

GlobeSt.com: You also said that payroll numbers are junk. Why?

Behravesh: Payroll numbers seem to be underestimating employment growth. First, payroll numbers miss self-employed people. They also miss startups. It takes a while for the payroll survey to catch up with new companies, and there are lots and lots of startups in this Internet age. So we think the household survey, which samples all the households in the country, actually does a better job picking up the strengths in employment.

For example, the September payroll numbers suggested that only 51,000 jobs had been created. Recent revisions suggest that 203,000 jobs have been created. That's a huge revision, and it makes you wonder how reliable the preliminary estimates are. Also, the payroll survey suggests that in the fourth quarter, 400,000 jobs were created. The household survey suggests that over a million were. That's a staggering difference.

GlobeSt.com: Where were those jobs created?

Behravesh: Everywhere. As we looked at the numbers--and the household survey doesn't pick up where the jobs are, so you have to extrapolate--it's almost entirely in services, but within that, it's pretty broad-based. It's in financial, health, education, travel and tourism and high tech.

GlobeSt.com: So payroll doesn't work for you. What does?

Behravesh: We look at a lot of different numbers. For instance, there was good news in the midst of the housing recession in that it didn't spill over to the rest of the economy or, in particular, consumer spending. The recession was offset by jobs growth and better wages. Certainly, the stock market has done well and gas and oil prices have dropped. So the housing decline was deep, but it didn't have much of an effect.

There are other sources of strength as well. One is capital spending. Companies are sitting on mountains of cash. We're seeing capital spending as one of the engines of growth. The other is exports. With the dollar down and growth outside the US doing well, exports in the fourth quarter grew probably 10% in real terms, which is very strong, especially after years in which our trade situation deteriorated.

So we look at all of these factors and put them together for our assessments. A lot of forecasters--ourselves included until recently--have been saying that average growth this year will be around 2.3%. We're going to be revising that up. Average growth will easily be 2.6% or even 2.8%.

GlobeSt.com: Compare the outlook for established and emerging markets.

Behravesh: There are two or three different strains of thought. First, we're still in the middle of a commodities boom, although it's peaked out. This means that emerging markets that are exporters have benefited tremendously. The vulnerability of course is if the cycle turns and we see a collapse in commodity prices. Then there are regions where growth has been more fundamental--Eastern and Central Europe is one, but the real star is Asia. Last year, China grew 10.7% and India grew 9%.

GlobeSt.com: There seems to be little fallout from foreign investment restrictions imposed last year in China. Do you see that changing?

Behravesh: There's a split in the Chinese government. There are those who see that foreign-direct investment has had a huge positive effect. Then there are the more nationalist types who think that somehow this is a bad thing. In the end I'm not that worried it will get in the way of China continuing to be an attractive place for US and European companies to invest.

Instant Insights /

Global Insight's Nariman Behravesh

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