When the Federal Reserve raises interest rates today for the first time in nine years, don’t panic. That’s the word from Dr. Roger Tutterow, economist and professor at Kennesaw State University. While TV talking heads may be fretting about the Fed tightening monetary policy, a 25 basis point increase in the Federal Funds rate means, “we are going from an insanely accommodative monetary policy to a very accommodative monetary policy,” that will likely leave the Fed Funds rate at 1.5% or lower. That translates to a 4.5% Prime Rate, which shouldn’t discourage borrowing.
Tutterow made his statement as part of a talk on the economic outlook for 2016 given to members of the American Council of Engineering Companies of Georgia on Tuesday.
A year ago Tutterow predicted 2015 economic growth of 2.4%. The country’s economic performance will fall slightly short of that for several reasons. Two of those were temporary: the extremely bad winter in the northeast, and labor issues at the Port of Long Beach. Both slowed down the economy for a time. However, the strong US dollar, while showing the relative strength of our economy–“We are the least dirty shirt in the hamper,” Tutterow said–also means that exports took a hit as prices of US manufactured goods became relatively more expensive overseas. The strong dollar probably took 1% off of GDP growth this year, according to Tutterow, and is a concern going forward.
Another ongoing concern for the economy is the low price of crude oil. While lower prices for energy help consumers and businesses alike, much of the progress the country has made in the recovery from the great recession has been in the energy sector. With oil prices being so low, it becomes difficult to make a profit extracting oil from the ground, much less expanding drilling capacity. Tutterow sees crude oil prices in the $40-$55 per barrel range for much of 2016.
While previous drops in oil prices have led to production cuts that eventually bring the price back up due to supply and demand, this time, Saudi Arabia and OPEC are acting differently. Tutterow has two theories for this: first, that the Arab countries don’t want United States oil production to become too dominant, and are keeping prices at a level where it’s impractical to expand energy production here. The other possible reason involves geopolitics. Middle Eastern extremists gain much of their cash through selling oil, and by keeping prices low, their access to cash drops. Meanwhile, low energy prices are no help for Russia, which is trying to increase its hegemony in the region.
Looking towards 2016, what does he see? Consumer spending, which picked up at the beginning of this year, will remain in place, but business investment will remain restricted, especially if oil prices remain low. Tutterow is calling for a 2.25 percent increase in GDP next year. He also sees less than a 25% chance of a recession, and predicts a low inflation rate of around 1.47%, or flat if prices of food and energy are removed.
Towards the end of his talk, Tutterow turned to politics. Noting that Ted Cruz has pulled ahead of Donld Trump in the latest Iowa polling and the Chris Christie and Marco Rubio are doing battle in New Hampshire, he was reluctant to publicly name a favorite candidate. But, he pointed out, the political map will be key. States like Georgia won’t count, he says, because they aren’t competitive. Georgia will vote for the Republican nominee a year from now. Instead, who controls the White House will be decided in North Carolina, Florida, Virginia, Ohio and other purple states. “When the parties look at their candidates,” Tutterow said, “they have got to pick people who can run well in that part of the country.” Tutterow pointed to areas like the I-4 corridor in Florida, Hamilton County, Ohio and Douglas County Colorado as key locations that will determine the presidency. He says the electoral map favors Democrats, and at this point, futures markets predict a 60% chance that Democats will hold the white house.