Despite all the hubbub leading up to this year’s presidential campaign, President
George W. Bush’s re-election won’t have an immediate effect on the nation’s
economy, according to Webster Bank’s economic advisor.
Nicholas Perna, an economist who specializes in analysis, forecasting and strategy, said most of what will happen in the nation’s economy for the remainder of this year and in 2005 is already “baked in the cake.”
“Whether John Kerry or George Bush won the election, it doesn’t have a huge bearing on the end of this year or 2005,” Perna said.
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Perna, an advisor with Waterbury, Conn.-based Webster was in Rhode Island last week, to acquaint himself with Webster’s newest market. Webster acquired Swansea, Mass.-based FirstFed Bank earlier this year.
In the immediate future, Perna suggests consumers keep an eye on two major factors: the price of oil and the Federal Reserve’s actions. The Federal Reserve was expected to meet late last week and raise the interest rate one-quarter point to 2 percent. This year, the interest rate has been raised four times totaling one point.
Perna said he expects the rate to be at 3.5 percent by mid-2005.
Consumers who have been waiting to refinance debt should stop waiting for rates to get lower and get to the bank, Perna said. They should also expect to see increases in their credit card rates and other short-term borrowing, he added.
“If you took out a home equity line of credit to pay for a college education or an addition on the house … the cost of borrowing is going up everywhere,” Perna said. “Bargains on fixed-rate mortgages are over.”
“But the good news is CDs and other long-term investments will be up,” he said. “In the near term, we’re in pretty good shape locally and nationally.”
The 3 percent inflation rate coupled with moderate to better-than-moderate job growth paint a positive picture of the nation’s economic future, Perna said.
“Right now is a very low inflation rate,” Perna said. “In 1980, it was 13 percent.”
The employment picture in Rhode Island is particularly impressive compared to neighboring states.
“The job market is getting better and will continue to get better,” Perna said.
In 2001, Rhode Island lost 1.6 percent of its jobs. Connecticut lost 3.6 percent and Massachusetts 4.3 percent. Since then, Perna said, Rhode Island has made the most impressive comeback, regaining 200 percent of the jobs it lost. By comparison, Connecticut regained just 10 percent and Massachusetts 15 percent.
The reason? Perna said the ability to start a small business and the proximity to other states with higher costs of living and doing business contributed to Rhode Island’s job recovery. Additionally, the revitalization of downtown Providence contributed to the overall economic growth in the state.
“One of the most impressive city rejuvenations I’ve ever seen is Providence, which is part of the dynamic,” Perna said.
On a national scale, Perna also advises consumers to watch the price of oil and the country’s trade and budget deficits in the post-election environment. Perna said he expects oil, currently priced in the high $40s a barrel, to be selling for $40 a barrel by next year.
However, Perna said he estimates there’s a 15 percent chance a global shortage or terrorism crisis could push prices to $75 a barrel, “which could change my not-too-shabby prediction to a recession.”
In addition to monitoring oil prices, President Bush will need to address the country’s twin deficits – budget and trade.
“Without cutting spending or raising taxes, we won’t get rid of it,” Perna said. “The twin deficits will be hanging over Bush’s head and that will make it difficult to enact tax reform.”
Since the trade deficit is financed by foreign lenders, Bush will also have to exercise caution when pursuing tax cuts because they tend to make foreign lenders nervous. If foreign financing slows, interest rates would rise, Perna said. He added there’s a 10 percent to 15 percent chance that foreign financing could become a problem.
In his second term as president, Perna said Bush will have to be much tougher on spending, but said there isn’t much historical precedent on the effect two-term presidents have on the economy.
While the stock market grew at an unprecedented rate during President Bill Clinton’s second term, that’s not necessarily a standard occurrence for two-term presidents. President Ronald Regan, for example, is better remembered for governmental restructuring and not controlling spending, Perna said.
