MCAA Breakfast Meeting at ISA Expo

Each year the Measurement, Control and Automation Association (MCAA) holds a breakfast meeting at ISA. This year's guest speaker was Dr. Adriana Fernandez from the Federal Reserve of Dallas. Fernandez gave her personal opinion and her outlook for the current and future state of the U.S. economy. Her overall view was that Gross Domestic Product (GDP) would grow at a 1.9% rate in 2007 and increase to 2.8% growth in 2008. The Unemployment Rate was predicted to remain stable at about 4.6%. Of particular interest to the automation sector was Dr. Fernandez's prediction of 4.9% growth in non-residential investment for 2008. It seems that some good is coming from the sub-prime mess, namely a diversion of investment from the residential to the commercial sector and especially the industrial sector. Delving deeper, Dr. Fernandez looked at three main factors influencing the U.S. economy; namely the sub-prime market, the decreasing value of the dollar, and energy prices. Sub-prime loans now make up 10% of the total U.S. mortgage market, way up over the last ten years. Sub-prime growth has been mainly due to the increase in securitization. In the past, banks made home loans and collected mortgage payments directly from homeowners. Securitization allowed banks and others to make home loans and then sell these loans to third parties. This removed much of the lenders' incentive to make sure that loans would be re-paid. The result is that 15% of adjustable rate mortgages, many of them sub-prime, are now more than 90 days past due. The bad news is that investors in pools of securitized sub-prime mortgages will lose billions. The good news is that home prices will decrease, solving some of the affordability problem that has plagued higher cost areas of the U.S. Other goods news is that investment will be diverted from real estate speculation to the industrial sector. The U.S. trade deficit was almost $60 billion in July 2007. Classical economic theory espoused by Dr. Fernandez posits that the trade deficit will drive the value of the dollar down. This is certainly occurring and should eventually moderate our trade deficit as goods and services produced in the U.S. become cheaper for foreign buyers. Dr. Fernandez said that recent rises in energy prices were largely driven by demand increases in North American and China. She expects these demand increases to continue and predicts that the price of oil will continue to rise in 2008. In summary, the overall economic outlook for the U.S. in 2008 remains positive with predicted GDP growth of about 3%, inflation around 2%, and a stable unemployment rate of 4.6%. The industrial sector should be a bit stronger due to predicted increases in non-residential investment and due to a weaker dollar.
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  • <p>Dan, Great recap of this session! I also had a chance to listen in. A few notes I'll add:</p> <p>* The yield curve between short term and long term rates until recently has been inverted (short term bonds have higher yields than long term bonds.) This leading indicator of slower economic growth has predicted 8 of the last 9 recessions. From the Fed's growth forecast, this time appears to be another exception. While the Fed was influencing the short term rate rise over the past few years on inflation fears, overall long term rates actually fell--meaning investors did not expect inflation to get worse. With recent rate cuts, the Fed's focus has shifted from inflation concerns to growth.</p> <p>* The Houston Chamber of Commerce would have been proud of her review of the local Houston economy. As an energy-driven economy, the city is booming, housing prices are still increasing, and jobs have been growing over the past 30-40 months. The forecast for continued growth remains strong.</p> <p>If the place where you live and work is not so dynamic, you should think about Houston and Texas overall--if you can stand the heat... :)</p>

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