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Economy should continue to improve in ‘15, but dangers persist

Economic recovery expected to continue in 2015, but dangers persist

By Brian McCullough,

Thursday, January 15, 2015

Many observers are optimistic 2015 will be a good year for the economy, but some are far more optimistic than others.

“I’m about as optimistic a person as there is out there,” said Joel L. Naroff, president and chief economist of Naroff Economic Advisors in Holland, Pa. “I’m at the top of most polls.”

As one reason for his optimistic outlook, Naroff pointed to the latest jobs report that came out Friday, which again showed the nation’s employment situation is improving.

“The economy has turned,” said Naroff, who writes a column for several regional publications. “The only thing that hasn’t turned is the wages. The missing link in the economy coming all the way back is wages. Everything else has come back.”

Once wages increase, consumers will have more money to buy goods, and with the economy producing at almost full employment, Naroff believes the nation could be in — finally — for a full turnaround.

“We could hit 5 percent unemployment by the end of the year,” the economist said. “I talk to businesspeople around the country and they tell me they are having trouble finding workers. That’s because they haven’t adjusted their wages. (And) anything consumer-based will kick in once wages go up.”

Less enthusiastic about prospects for 2015 — at least for investors — are the experts at mutual fund giant Vanguard, headquartered along Route 202 in Tredyffrin and East Whiteland townships.

During a webcast last week, F. William McNabb III, Vanguard’s chairman and chief executive officer, and Mortimer J. “Tim” Buckley, the company’s chief investment officer, answered questions from investors.

Vanguard has predicted growth of the U.S. economy in the range of 2.5 percent to 3 percent for 2015.

Investors tuning in to the webcast were asked to rate their biggest concerns for the world economy, which could impact the performance of their investments and the U.S. economy.

The biggest concern, at 39 percent, was the potential of deflation in Europe, followed by the prospect of the Federal Reserve raising interest rates, volatile oil prices and slowing growth in China.

Others emailing questions in were concerned that the improving U.S. economy could produce a new round of inflation.

McNabb said he could understand concerns about inflation, given its effects on consumers and how difficult, historically, it has been to get under control once it starts.

But, he said, “wild” inflation is not a scenario Vanguard sees on the immediate horizon.

“There’s no data to suggest that,” McNabb said of high inflation returning to U.S. consumers in 2015.

Instead, according to Vanguard economists, it is the state of the world’s economies that could threaten a continued U.S. turnaround.

“Similar to our stance for 2014, we view the global recovery as likely to proceed at a modest pace,” several of them wrote in a paper looking at 2015 that was recently published on Vanguard’s website. “World economic growth may remain frustratingly fragile, with long-term trend growth in the major economies significantly lower than during past decades as a result of slowing productivity growth and unfavorable demographics. Potential trend real GDP growth for the developed economies seems to have marched lower for years — since well before the global financial crisis — with population and productivity growth rates both falling to levels less than half those of the 1950s–1970s.”

McNabb and Buckley, not surprisingly, pitched the company mantra for investors to develop a disciplined savings program and to stick with it no matter what the markets are doing.

“Stick with your plan,” Buckley advised. “Try to tune out the noise. And in 2016 (investors) will be very happy.”