Richard Moody’s job includes figuring out what he doesn’t know. In fact, the unknowns are what keep the Regions Bank chief economist awake at night. You could say he doesn’t like surprises, at least the kind that disrupt the economy in negative ways.
Moody and Regions’ chief investment officer Alan McKnight were in Tampa on Thursday to speak with a group of clients and potential clients about the country’s financial health. Afterward, they sat down with the Tampa Bay Times to talk about the effect of coronavirus, the national debt and why Florida is better positioned than before the Great Recession.
Here are excerpts from the interview, edited for length and clarity:
You both seem relatively positive about the current state of the economy. Why?
McKnight: Inflation remains low. While that may be hurting the energy sector, it is a huge benefit to consumers and businesses as it relates to lower oil prices and lower energy prices. Also, unemployment is low, so people have money to spend. And companies are on relatively solid footing, at least currently.
What about Florida?
Moody: Florida’s economy is geared much more toward the consumer sector, and consumers are in very good shape right now. Household balance sheets are in the best shape they’ve been in for probably two decades. Our premise is that the next recession starts in the corporate sector, so in that sense Florida should not be as exposed. Obviously, there would be some impact on the consumer sector, but it won’t be like it was when the housing market was ground zero.
Is anything keeping you awake at night?
McKnight: It’s things like whether inflation comes back. We’re not expecting that and the markets aren’t expecting that. So it would be an enormous concern if inflation went up dramatically. The second thing would be continued economic malaise globally. Where we don’t get any major event, but we just can’t sustain the type of growth that we’ve had and the economy keeps faltering.
Does the long economic expansion make us focus too much on what might bring it to an end?
Moody: A lot of people assume that because it’s an old expansion that it must be about to die. That’s not necessarily the case.
I do worry about what I’m missing, the unknown unknowns. An economy expanding at 2 percent or less doesn’t have much capacity to absorb shock. It’s already had to absorb the issues with Boeing and the coronavirus
How concerned are you about the impact of coronavirus on markets and the overall economy?
Moody: That will depend on how far it spreads and how quickly we get it under control. When SARS (severe acute respiratory syndrome) broke out in 2003, China accounted for about 4 percent of the world’s combined GDP (gross domestic product). Now it’s 16 percent, so the potential for disruption is greater.
Corporate debt is at all-time highs. Should we be worried?
Moody: It’s a big deal in the sense that so much corporate debt (more than half) is triple B rated, which is one step up from junk status. It doesn’t take much in the way of downgrades — the economy slows, profit margins erode — to send a very large wave through the credit markets. That’s something that could push the economy into recession. It’s the scenario that internally we’ve been modeling for about two years — a recession coming out of the corporate sector.
McKnight: And a lot of that debt is covenant lite, meaning it’s easier for companies to get the debt, and it’s not as onerous to pay back once they have it, which is a change from five or 10 years ago. But there’s a bit of a risk there. You’ve effectively been lending to companies that can’t support that level of debt, except for the fact that it was much easier to get.
When should we start worrying about the $23 trillion national debt?
Moody: I worry about what will happen eight to 10 years from now when the entitlement time bomb goes off. We’re not at all prepared for the increase in costs associated with Social Security and Medicare. There are going to be consequences.
You could argue whether we ought to be more disciplined today, particularly 11 years into an expansion. Should we be running trillion dollar annual deficits? The time to worry about this is now, not when the crisis is staring you in the face. But there’s no gain at the moment to be the politician out there seriously suggesting we need to look eight or 10 years down the road.
Could the national debt bring on a crisis similar to the housing crisis in 2007-2008?
McKnight: The difference is that the housing crisis came as a surprise, not to everyone but to many. With the debt, whether people want to acknowledge it, we have the information in front of us. We see the numbers. The data is very clear. So it's more about galvanizing support around a plan.
Moody: If we're gonna stick to this path of entitlement spending, do taxes go up? Does spending in other areas get cut? Who knows what the macro impact of that can be. It's obviously very significant.
Debt in-and-of-itself isn’t bad. It’s what are you doing with the debt. We’re in denial over infrastructure. It’s crumbling, and we can’t seem to agree on the solution. You look at other needs that are going unaddressed and you have to ask, Why are we running trillion dollar deficits? Where’s all that money going? To me, the distressing thing is that we’re not facing up to some very significant issues that are staring us right in the eye, whether it’s infrastructure, entitlements spending or affordable housing.