Economic Outlook: Bracing for More Fed Hikes

“Consumer confidence is sky high…consumers are spending,” reported Dimitri Delis, Ph.D., Managing Director, Senior Econometric Strategist for Piper Jaffray Companies at Partnership Bank’s Annual Economic Outlook.

“This is the first time in a long time that GDP averaged about 3% for two consecutive quarters,” he noted. “Economically, this is surprising …we see that there is momentum in the economy. Question is, what is underneath this momentum?” he asked.

“If we want to know what’s behind the current GDP growth, all we need to do is follow consumer spending which has contributed 95% of all GDP growth in the past two years, typically the consumer spending comprises 65% of GDP growth,” he concluded.

Is the Consumer Strong Enough to Spend?

“Consumers are earning less and spending more,” Delis continues. Taking a closer look, Delis points out that consumers are using revolving credit (credit cards) to make purchases. Credit card debt is back to 2008 levels while the personal savings rate is at its lowest value since 2007. As the Fed raises rates this year, variable rates (as are most credit card rates) will follow suit – contributing to a widening of the gap between consumer debt and savings.

Given the facts, Delis suggests that this trend is not sustainable for much longer. “So what happens when you have too much consumer confidence…consumers save less, spend too much, and tap out their savings. Eventually they can’t spend as much. When consumer spending drops the equity markets drop,” he said noting that the spread between spending and savings is even stronger than it was in 2007-2008. “There won’t be an immediate drop,” Delis suggests, “however, the economy looks like it will start to weaken over the next two years as the result of this widening gap between the lack of consumers saving and their high debt levels.” He further notes, “historically, a low has always followed a high”.

A Puzzle: Low Wage Growth with Low Unemployment

The Federal Reserve Board argues for raising the Fed Funds Rate this year because they are afraid of wage pressure (rising wages). Even in our current low unemployment environment, when typically wages rise due to lack of workers, wages remain low. “Why is that?” Delis asked. “We saw that in the 1960s, 70s, and 80s when unemployment dropped to low levels, wages dramatically increased because there were less workers to fill positions. Today however, the unemployment rate is at 4% and wages haven’t gone up. Back then, we lived in a closed economy – now we live in a global economy and have full access to a global job market with jobs being outsourced across our borders.”

A second factor keeping wages low has to do with productivity and inflation. Unlike other periods of low unemployment, the trend over the last 30 years has been that wages have grown faster relative to inflation and productivity. “We’ve seen, since 2008, that on a relative basis, inflation hasn’t picked up and productivity hasn’t picked up which results in low wage growth,” Delis showed.

Inflation and the Stock Market

The Federal Reserve Board has two mandates: maximize employment and keep inflation down. The US Stock Market, unlike the stagnant wage growth, is booming. Even though the Fed, in October 2014, stopped Quantitative Easing (QE) which increased the money supply that resulted in lower interest rates to stimulate the economy, the stock market continues to rise at a record pace. Worried about financial asset inflation (financial instruments such as bonds, shares, and their derivatives, as well as real estate and other capital goods) as opposed to ordinary goods and services inflation (of which there is little to no inflation) the Fed has signaled it will raise the Fed Funds Rate to curb the continued rise in the stock market.

Contributing to the rise in the US Stock Market are investments from foreign entities. Not only does the US offer the highest interest rates in the world, the US Stock Market is attracting a significant portion of foreign investors. For example, in September of 2017, the reported value of the Swiss National Bank’s portfolio of US stocks was $62.4 billion. Top holdings of the Swiss National Bank include $15 million in Apple as well as significant investments in Microsoft Corp., Exxon Mobil Corp., Johnson & Johnson, AT&T, Amazon, GE, Facebook, Inc. and alike. Delis also noted that the Bank of Japan is heavily invested in US Stocks. Delis concluded that, “the market is getting its strength from many places including foreign investors along with the reshoring of money by US companies.”

Oil and Inflation

Oil has played a disproportionately strong role in pressuring inflation expectations higher. Since June 2017, the price of oil has steadily climbed. During this period, the 10 year break-even inflation rate has also moved higher. Delis showed the strong correlation between the 10 year break-even inflation rate and the price of oil, suggesting that if oil prices continue to climb, the 10 year Treasury rate may move higher in tandem.

“However,” says Delis, “Several factors suggest that oil may be near a top and could move lower over the next several months:

  • Production cuts by OPEC, favorable demand projections, unrest in Iran, geopolitical tensions throughout the Middle East and supply disruptions in the North Sea and Venezuela are beginning to dissipate, increasing the likelihood that oil prices may soon start declining.
  • Production in the North Sea has returned to normal following repairs of the Forties Pipeline System and production has resumed in Libya after repairing a blown up pipeline.
  • China, which purchased substantial amounts of crude for its strategic and commercial storages, edges closer to filling its available storage tanks resulting in a decline in demand.
  • Increased oil production in the US. Shale drillers have gotten more efficient. The US Energy Information Administration predicts US production in 2018 will surpass that of Saudi Arabia and challenge Russia, which is the top world producer.”

Possible Results of Further Fed Rate Hikes

As reported, the Fed’s mandate is to maximize employment and keep inflation down.

A rise in the Fed rate while wages remaining low coupled with the concern that rising rates will negatively affect the majority of consumers who have over extended their use of revolving credit is a concern.

A rise in the Fed rate to slow financial asset inflation and curb a robust stock market supported by both US as well as foreign investors may ease the Fed’s worries but it is not known what it will do for the US Economy.

A rise in the Fed rate to counteract the effects of rising oil prices (and inflation) may be for naught as oil prices are expected to drop now that production is back to 100%, US production is expected to increase more than any other country in 2018, and world demands are lowered.

The dice with the answer are still rattling in the cup, but one should never rule out the possibility of winning their game.

Partnership Bank’s annual Economic Outlook is one of a number of events focused on adding value and making impact on  area business and community leaders. This program supports the Bank’s ongoing commitment to educate and provide leadership in the communities it serves.

January 2018

Economic Outlook: Bracing for Hikes


November 2017

The Time is Right for Solar


September 2017

Checklist for First Time Home Buyers

January 2018

Piggy Banks by the Hundreds


December 2017

Singing on Main


November 2017

Jingle All the Way Wins!

The Extraordinary Among Us


October 2017

Love of Neighbor Shines

January 2018

Nichols Promoted to Bank Officer

Partnership Bank Promoted Muntner

Partnership Bank Promotes Iverson


November 2017

Getting There: Rahim Keval

Heckendorf Joins Business Team


September 2017

Doherty Joins Ag/Business Team

Steve & Karen Koenig

Koenig Concrete, Corp.

The Time is Right for Solar

“We want to do the right thing,” said Steve Koenig, Founder - Koenig Concrete, Corp. “The right thing is investing in solar energy now,” he continued.

“It was an easy decision,” added Karen Koenig, President - Koenig Concrete, Corp., “besides the financial incentives, solar makes ecological sense.”

In August, Full Spectrum Solar out of Madison will be installing a 1,150 sq. ft. roof mounted 23 kW photovoltaic system on Koenig’s building located in Jefferson. The system will provide approximately 81% of Koenig’s electricity, cutting their electric bill by $3,480 or more.

Advantages of Solar:

  • Grants from the USDA, incentives from Focus on Energy, and a federal tax credit of 30% (currently until 2019) substantially lower system costs and provide tax advantages.
  • Solar PV has no moving parts aside from the electrons, creating the most reliable and efficient renewable energy system available.
  • Grid-tied systems waste very little energy because any energy that is not immediately consumed is fed into the grid and sold to other customers.
  • PV panels are sustainable - the silicon cells are crystallized from purified sand and can be recycled along with the aluminum and glass after a few decades of use.
  • PV technology continues to become cheaper and more efficient while fossil fuels generally become more difficult and costly to extract via techniques such as hydrofracking, tar sand refinement, and deep-sea oil drilling.
  • Current pricing on panels and inverters are near lows with intense competition among manufacturers.
  • ROI begins on the first sunny day.
  • Solar units have a lifespan of 25 or more years with little to no maintenance required.

“With electric bills increasing on average of 3% per year, solar makes sense,” said Mark Warnick, Project Engineer - Full Spectrum Solar, “think of it as hedging against rising utility rates…as rates rise, your savings grow.”

In addition, “the cost to install a solar unit today is less than half of what it was six to seven years ago,” he added. “When you purchase a solar system, you are in control of your electricity costs…technically, you’re buying your own power plant,” Mark concluded.

Financing the Project

Total cost of Koenig’s solar system installed is $59,000. Breaking from traditional financing, Karen chose a leasing program. “Leasing made sense for a number of reasons,” Karen said.

“We chose a lease to own plan, which we obtained through our local, community bank. Unlike a traditional loan which required a down payment, a lease didn’t,” she said. “In addition, we received an answer from the bank within days without filling out much paperwork. And, with a lease, we could roll in soft charges such as installation and the structural engineering survey into the lease. Our lease payments are fixed for 36 months – the time it will take to pay off the entire system.”

Doing the Right Thing

By installing a solar power system on their commercial building, Koenig’s are doing the right thing.

  • Securing reduced energy rates for 20+ years
  • Reducing their carbon footprint and protecting the environment
  • Increasing their energy independence
  • Serving as a role model for businesses and homeowners
  • Lowering costs by taking advantage of tax incentives, rebates, and grants.
  • Managing their budget by leasing to own versus a traditional loan.

Koenig Concrete, Corp. is a certified Woman-Owned Business Enterprise (WBE). Koenig Concrete, started in 1990 by two guys and a bobcat, has grown to 20+ employees. They specialize in commercial and residential poured walls and flatwork, as well as decorative concrete options.

Steve & Karen Koenig

Koenig Concrete, Corp., 1401 S Industrial Drive Jefferson •

Contributor: Full Spectrum Solar,  1240 E. Washington Avenue, Madison •

Mortgage Ready Means: Carefree Financing

Homebuying Made Easy

Buying a home is fun as well as stressful, especially if it is your first time. One thing all people (not just potential homebuyers) should consider is building their Credit Score. A Credit Score shows potential lenders/creditors your financial situation. Having a good credit score (700-850):

- Makes it easier to obtain a mortgage or other loan.

- Lowers the interest rate (higher the score, lower the rate)

- Is a factor in securing utility services such as cable, water, cell phone, etc.

Establishing and Improving Your Credit Score

A Credit Score is built over time. If you don't have a credit history, it may be hard to get a loan or even a credit card. Now is the time to start. A good way to start is to apply for a credit card. Then use it and make timely payments.

Once you've started building your Credit, make sure you form good habits.

- Make 100% of your payments on time (including credit card and utility bills).

- If you carry a balance, make sure it doesn't exceed 30% of your credit limit.

- Avoid opening too many new accounts (a credit card at every store where you shop).

- Keep accounts open for as long as possible.

- Don't "max out" your credit cards. Too much outstanding debt hurts your score.

- Review your Credit Score to make sure it is accurate (at least once a year).

There is no "magic formula" for building a good Credit Score. A slow and steady payment history without too much debt wins every time.

Credit Ready: More than a Good Credit Score

Being "Credit Ready" tells realtors and home sellers that you are able to buy. Credit Ready requires:

- A good Credit Score

- Down Payment - 20% is best to avoid Private Mortgage Insurance (PMI)

- Reliable income to show you can pay back your mortgage loan.

Whether just starting out or ready to shop, we're here to help you get ready for your new home purchase. Turn your dream into reality...start building credit now.