‘Painful return to normal’ seen for U.S. economy

But NBT Bank exec tells Bedford audience ‘I don’t believe the sky is falling’


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More inflation, higher interest rates and a stock market plunge of about 20 percent in the near future.

Relax. It’s just a “painful return to normal,” according to Ken Entenmann, chief investment officer of NBT Bank, the Syracuse, N.Y.-based bank with 152 branches – including four in New Hampshire. Entenmann was at the Manchester Country Club in Bedford on Thursday to offer his annual economic outlook.

While other people might be shaken by the market’s previous February correction, he said, “my advice is for you to stay in the game. Corrections are healthy. Grin and bear it.”

After all, he added, “for 10 years we have been begging for certain things to happen” and most of them have.

For instance, there’s lower taxes. The United States had the highest corporate tax rate in the world, and now the rate has dropped from 39 percent to 22 percent. And since many larger corporations were escaping payment of the full rate, the big cut mainly benefits small businesses, at least on a national scale, said Entenmann. (Most businesses in New Hampshire aren’t corporations, but partnerships, and while many of them will also get tax break, it won’t be as large and will be more complicated.)

That tax cut has meant bonuses for employees of some companies including NBT, which, with assets of $9.2 billion, is the 90th biggest bank in nation.

Last year, NBT earned $86 million. Thanks to the drop in its effective tax rate from 33 percent to 22 percent it will increase its minimum wage from $11 to $15 an hour and give a 5 percent raise to employees who made less than $50,000, benefitting 61 percent of its workforce.

More than 500 businesses, including four based in New Hampshire, have done similarly, according to Americans For Tax Reform, a strong supporter of the tax cut. Entenmann dismissed articles stressing that this was a small percentage of businesses, most of which were using the money to buy back their stock and give out dividends,

“I like that” he said, because when a company returns money to shareholders “that’s money that is circulating in the economy.”

‘Deeper correction‘

Then there are higher wages. While Entenmann said tax cuts contributed to a 2.9 percent wage increase, he put a greater emphasis on the low unemployment rate, which has been forcing businesses to pay more to get workers. He predicted the wage increase won’t go much higher than 3 percent, which would still be a point below normal.

As for the stock market, it tanked about 10 percent in after the February announcement of the wage uptick. Part of that was due to irrational fear of wage pressure, but Entenmann also puts the blame on the market itself, for coming up with another exotic derivative: Velocity Shares, which is bet against a market volatility index. In other words, he said, “smart money was playing with fire.”

When the market did begin to gyrate, Velocity Shares’ value fell by 90 percent, and the instrument crashed. This forced some investors to sell off their regular stock, which drove prices down further. But the market recovered.

So far this year, the “market has been basically flat, but after the way it has been going up the last few years, flat is not so bad,” he said.

Indeed, it has experienced 106 months of expansion, closing in on the record of 120. And this time, the United States is not alone. Some 97 percent of the markets in the world are growing, he said – the kind of synchronized growth that economist were wishing forth.

“Another deeper correction is also overdue,“ he said. There was not one day in 2017 that the stock market went down by more than 2 percent, he said. This year, it has already happened eight times – a pretty normal occurrence. And it means that stocks are cheaper and will probably go up, though Entenmann predicted an even larger correction – 20 percent – in the near future.

Another cause of market volatility is fear of inflation. But the economy has experienced nearly eight years of near-zero inflation, “and that is not normal,” he said. But now it is a rate of close to 2 percent, the Fed’s target, and investors are worried that wage growth will push inflation out of control.

That “keeps me up at night” as well, he admitted.

The United States doubled its debt over the last 10 years to more than $20 trillion. But the amount of interest it pays has only gone up slightly because of falling interest rates.

“We’ve been rolling over debt and refinancing for years,” he said.

If interest rates go up substantially, it will “suck a lot of the economy.”

Still, Entenmann said, “earnings have been so spectacular” that a modest growth in inflation won’t tank the markets.

“I don’t believe the sky is falling,” he said.

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