No Recession Repeat

U.S. Economic Expansion Not Over Yet, Economists Say

Elizabeth Williams
By  Elizabeth Williams , DTN Special Correspondent
Texas A&M real estate economist Mark Dotzour told the People's Company Land Expo he's still bullish on farmland long-term, but he cautioned buyers not to be highly leveraged. (DTN photo by Elizabeth Williams)

WEST DES MOINES, Iowa (DTN) -- If you are looking for a metaphor to describe where the U.S. is in the general economic cycle, Texas A&M real estate economist Mark Dotzour puts us in the seventh or eighth inning of expansion.

"We're not done with this economic expansion cycle yet," Dotzour told 630 farm operators, investors, lenders and brokers at the People's Company Land Expo last week.

Dotzour is encouraged by household net worth, consumer confidence and jobs outlook. Home construction also looks good and is a key economic indicator. "What led us out of recession in 2009?" asked Dotzour. "Agriculture and energy. Now single family home construction will contribute to growth in 2016 and 2017. Home construction still has room to run and will be the economic driver to make up for the slump in the energy business."

Dotzour, who served for 18 years as chief economist of the Real Estate Center at Texas A&M University, predicted no inflation in the U.S. until after oil prices bottom.

"Energy is driving everything nowadays," concurred another Land Expo speaker, Dennis Gartman. He's editor and publisher of the respected Gartman Letter, a daily financial trading commentary.

"In my lifetime, we will not see crude oil back above $45 a barrel for more than a week. And if it spikes above that briefly, it will be only because of geopolitical risk," said Gartman.

However, Gartman was more negative about the next six months. "Short-term, stocks are going lower. But I'm bullish long-term. On the grand scale, the U.S. economy is strong, [especially compared to other countries]. And the U.S. dollar will continue to be the world's reserve currency."

Gartman also does not expect the Fed to raise interest rates much this year. "People who say the Fed funds rate will rise three or four more times this year -- that's nonsense."

Even if the Fed raises rates slightly, it won't mean anything, said Dotzour. "We may see a couple of meaningless rate hikes by the Federal Reserve," predicted Dotzour. "But, I'd be surprised if long-term mortgage rates go above 4%. The Fed is more afraid of deflation than inflation. A big stock market decline could reduce spending in the U.S."

In his prediction for continued economic expansion, Dotzour said that does not mean a strong economy. Dotzour pegs GDP growth at a tepid 2%.

Dotzour noted in the 11 U.S. economic cycles since 1945, the length of the average expansion was 58.4 months. "As of January, our current expansion is in its 79th month. However three of the past expansions since 1945 lasted longer than 90 months," he said.

Although Dotzour doesn't look for interest rates to go up much any time soon, "Be careful with leverage. That's what makes people fail in downturns," he advised.

"I'm still bullish on farmland," said Dotzour, "but without leverage. Where will farmland be in 10 years from now?"

Dotzour pointed out that farmland is a much better inflation hedge than gold, adding that stocks and bonds are not too exciting right now.

"What's my 'Black Swan'?" Dotzour contemplated. "If Putin runs out of money and gets tired of oil below $30 a barrel. And, he blows up oil production in Iraq and Libya and also blows up Russia's worst oil refinery and then blames America for it."

He predicted crude oil price won't go down to below $10 per barrel, but it will stay below $45 per barrel, except for maybe a short-term spike because of a global political event.

Gartman is concerned about Russia. "Putin needs oil prices to be $75 per barrel to meet Russia's needs," he said. But Gartman reassured the audience that there is plenty of oil in the world.

"We have better technology, better geology, better fracking today. Two years ago we had 1,600 drilling rigs in the U.S. Now we have only 500 operating rigs, but production is going up," he said.

"Fifteen years ago, we'd drill down and have a hit rate of 50%. We had pictured drilling as a fist going down to a pond of oil. Now, we know it's more like fingers. Our hit rate is around 95% and from the same drilling spot, we can bend out 15 to 18 pipelines to extract oil. This has been developed in the last five years," Gartman said.

Fracking has exploited vast tracks of oil reserves, both here and abroad. "Not only in the U.S. but there is frackable land, yet to be developed, in Russia, China, France, England, Southeast Asia, Africa and off-shore in Brazil," Gartman added.


Elizabeth Williams