NABE Policy Survey: Debt a Rising Challenge to U.S. Economy

The NABE Economic Policy Survey presents the consensus of a panel of 320 members of the National Association for Business Economics. Conducted semiannually, this survey was taken Feb. 13-Feb. 27. May be reprinted in whole or in part with credit given to NABE. View the survey results, including complete tabulations, online at www.nabe.com. This is one of three surveys conducted by NABE. The other two are the NABE Outlook and the NABE Industry Survey. Catherine L. Mann, Brandeis University; Richard Brown, FDIC; and Kathleen Camilli, Camilli Economics, conducted the analysis for this report.

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“NABE members are fairly sanguine about the U.S. economy, and a growing number think that fiscal and monetary policy are about right,” says Carl Tannenbaum, NABE President and Chief Economist, ABN-AMRO/LaSalle Bank. “But concerns about household and/or corporate debt are creeping in and housing markets remain a point of vulnerability. Concerns about the Middle East abroad and health care at home are increasing in prominence.”

Short and Long Term Risks and Challenges

Terrorism continues to rank atop the list of short-term problems facing the U.S. economy according to 35% of NABE survey respondents, compared to 34% in August 2006 and 26% a year ago. Those listing energy prices as the greatest source of concern dropped off to just 9% compared to 29% last fall. Replacing energy as rising sources of concern were: excessive household and corporate debt (13%), the impact of a rising current account deficit on the dollar (12%), and a shortage of skilled labor (7%).

Short-Term Risks to the US Economy (Percent of survey panelists responding)
	Survey Date
	Mar 05	Sep 05	Mar 06	Aug 06	Mar 07
Defense/terrorism	24	20	26	34	35
Excessive household/corporate debt	2	9	7	5	13
Current account deficit	15	11	13	11	12
Energy prices	11	30	23	29	9
Employment issues	2	1	1	1	7
Govt spending/ deficit	27	13	14	2	5
Inflation	6	5	3	12	4

Health care costs and growth of the elderly population were ranked the two biggest long-term challenges to the economy, with some 48% of respondents listing one of these issues as their greatest source of concern. These issues surpassed both federal deficits and educational inadequacies, which were the most commonly cited long-term concerns in the August 2006 survey.

Longer-Term Challenges to the US Economy (Percent of survey panelists responding)
	Survey Date
	Mar 05	Sep 05	Mar 06	Aug 06	Mar 07
Health care	23	23	22	16	25
Growth of elderly population/dependency ratio	22	18	21	17	23
Federal deficit	21	22	22	23	19
Education system	16	21	16	21	15
Energy issues	4	4	8	13	8
Competitiveness	8	7	5	4	4

A flexible economy and labor force, a technological lead, and strong productivity were still ranked America’s largest strength by 65% of those surveyed.

US Economic Strengths (Percent of survey panelists responding)
	Survey Date
	Mar 05	Sep 05	Mar 06	Aug 06	Mar 07
Flexible labor markets/economy	35	42	35	39	38
Productivity/technology	35	26	29	27	27
Deep capital markets	12	11	16	18	17

Monetary and Fiscal Policy

NABE members have become more comfortable with U.S. fiscal policy compared with previous surveys. Although a narrow majority (50%) still thinks that fiscal policy is too stimulative, about 42% say that fiscal policy is about right, more than double the August 2006 reading. Over the last year, the percentage of the membership preferring unchanged fiscal policy has risen from about 10 to about 30 percent. Of the remaining respondents, nearly two-thirds would like fiscal policy to be more restrictive in the next two years; but only one-third predicts that will be the outcome; another one-third thinks that fiscal policy will be more stimulative over the next two years.

Percent of NABE Panelists Who Consider Current Policy to be "About Right"

Monetary Fiscal

NABE members continue to be very comfortable with monetary policy, with more than 80 percent now saying the current policy is about right. The share saying that monetary policy is too stimulative has steadily trended downward since late 2005. Although two-thirds would prefer monetary policy to remain unchanged over the next six months, about 20 percent would like it to be more stimulative. When considering the likely policy moves, the percentage expecting interest rates increases has fallen from nearly 90 percent last March to only 22 percent now. A relatively small share (15%) expects a reduction in interest rates.

The new Democratic congress is unlikely to affect Fed strategy. Only twenty percent of respondents think that the change in Congress will temper Chairman Bernanke’s promoting of inflation targeting as a policy approach. In other financial matters, a resounding 84% of NABE members would like to see financial regulators encourage greater transparency with regard to new capital market instruments and institutions (hedge funds, private equity, CDOs).

Other Questions

One quarter of the NABE membership thinks the U.S. trade deficit is a major threat that will cause serious problems, up from one-fifth last year. On the other hand, one-third think creditor nations should be more concerned about disruptive adjustment while another third thinks that the markets can handle the deficit with no major dislocations. While global policies aimed at growth are viewed as the most effective policy, NABE members see reducing the fiscal budget and reducing consumption by sunsetting the personal income tax cuts as potentially playing a greater role than exchange rate adjustments.

With regard to policy efforts related to exchange rates, more than 60 percent indicated that exchange rate changes did not have much of an effect these days on the trade deficit, in part because of the role of multinationals in trade.

The fall-out from the trade deficit may be protectionism. NABE members are much more concerned that the trade deficit will lead to trade protection and increased foreign ownership of U.S. assets as compared to a year ago. Fully one-third see increased trade barriers as a consequence of higher trade deficits, and more than 15 percent are concerned about foreign ownership of U.S. manufacturing, up from 8 percent last year.

While health care costs are the most commonly cited long-term threat to the U.S. economy, there remains little consensus as to how to address the problem. Some 36% of respondents said that “improving incentives on [health care] consumption” was the most important policy goal, followed by “expanding coverage” (31%) and “improving efficiency” (21%).

NABE members were critical of proposals to impose payroll taxes on small businesses who do not offer health coverage. Only 53% agreed that these plans would expand coverage, while 64% said they would make the system less fair and 79% predicted that they would impose burdensome costs on small businesses.

Percent of NABE respondents who think state-level proposals to tax employers who do not offer health insurance coverage will result in:

health

The outlook for oil prices has moderated significantly since the August 2006 survey. The median forecast for summer 2007 oil prices is now $60, compared to a median forecast of almost $75 in the last survey taken in August 2006. However, the potential effects of higher oil prices are thought to be greater now, with the median respondent indicating that $90 oil would be enough cause a recession now vs. the $100 threshold indicated by the August 2006 survey.