Strategist: Uncertainty still holding back U.S. economy

Seven is the lucky number for the superstitious. But for the U.S. economy to avoid falling back into recession, the number three needs to play a critical role.

That’s an important part of the message delivered Friday morning by John Augustine, chief investment strategist at Cincinnati-based Fifth Third Bank, who spoke at IBJ’s annual Economic Forecast event.

Gasoline prices need to stay within the $3-per-gallon level, the inflation rate needs to be at or below 3 percent (it’s currently at 3.9 percent), and gross domestic product needs to grow 3 percent.

“Our economy has been growing 1.5 percent (annually); it’s built to grow 3 percent,” Augustine said. “If we’re running half-speed, who’s going to pick up the slack, because we are a global economy.”

The onus could fall on emerging countries. China’s economy, arguably the largest among the emerging countries at $5.9 trillion, is growing at an annual rate of about 9 percent.

To put that figure into perspective, though, the economy of the United States totals $14.6 trillion—more than twice as large as China’s.

Much of the U.S. economy’s health moving into 2012 will depend on the federal government’s ability to soften the debt crisis, Augustine said.

“The tension between Washington and the private sector is not healthy,” he said. “Much of the private sector has righted its balance sheet. Now it’s the government’s moment.”

The federal government is running a $1.5 trillion annual deficit by spending $4 trillion a year but only taking in $2.5 trillion in revenue. The amount the government spends accounts for 27 percent of all U.S. economic activity compared with Europe at 6 percent. That’s why Standard & Poor’s took the unusual step in August to downgrade the U.S. credit rating, Augustine said.

Uncertainty in the economy continues to cause U.S. companies to stockpile cash—to the tune of $2 trillion.

Apple Inc., for example, doesn’t pay a dividend, doesn’t buy back shares and is sitting on $81 billion in cash, he said.

“Do something with it,” encouraged Augustine, who thinks corporations are becoming more like banks. “Give it back to shareholders; give people a raise.”

In addition, the nation’s 9.1-percent unemployment rate still is dragging down the economy.

Low mortgage rates, however, provide a glimmer of light for potential homebuyers or homeowners considering refinancing. The Fed continues to keep rates low—about 4.11 percent for a 30-year fixed conventional mortgage—in an effort to clear the huge inventory of homes on the market. For homeowners who have a mortgage rate north of 5 percent, it’s time to refinance, Augustine said.

Yet, lending practices remain way too strict, he added.

Augustine made few predictions on whether the issues hindering the economy would be resolved anytime soon. He said the risk of another recession was about 50/50 in the next 12 months.

“Underneath it all, there’s still profitability and economic activity,” Augustine said. "But a lot of us are sitting on our hands searching for direction.”