As the new year draws begins, we asked a hand full of leaders in the regional financial services community to look at the year ahead and share their thoughts on what’s in store for all of us.
 Craig Alexander, Senior Vice President & Deputy Chief Economist at TD Bank feels that “the Great Recession has drawn to a close, but its legacy will be with us for quite some time.”
 Alexander sees the economy as likely to expand by a little less than 3% in 2010. “That’s not a bad performance, as it is close to the long-term average. However, given the depth of the 2009 recession, one might have hoped for a bigger bounce back.” Alexander says.
 “The outlook for a gradual recovery is due to a number of headwinds. First, it will take time for the financial system to recover, and weakness in commercial real estate will be an on-going challenge on this front. 
 “Second, residential real estate is improving, but there is a considerable inventory of unsold and foreclosed homes that will be a hurdle. 
 “Third, high unemployment and slow job creation suggest that consumer spending will advance at only a moderate pace – and consumer outlays make up the bulk of the economy. 
 “Fourth, much of the strength in the economy during the second half of 2009 came from government stimulus; but, this influence will wane over the course of 2010. Indeed, the baton must be passed from government-fuelled growth to private sector supported growth. The transition may not be smooth, since the latter is likely to remain fragile,” Alexander feels.
 He also believes that inflation will not be a problem this year. “The gradual increase in demand from households and businesses, combined with constrained lending by some financial institutions, and the considerable slack in the economy from high unemployment and unused plant and equipment all point to minimal price pressures. The combination of slow economic growth and low inflation leads to the forecast that the U.S. Federal Reserve will leave interest rates unchanged until early 2011,” Alexander believes. “The bottom line is that the recovery is for real and should be sustained, but the healing process will take time,” says Alexander.
 A more pessimistic view is offered by Gerry Banmiller of 1st Colonial National Bank. “There is a mistake by those who see economic growth in the past few months. It is a facade prompted by government spending,” contends Banmiller.
 “The other issue is overcapacity and high unemployment,” sayds Banmiller. “The unemployment rate will continue to increase because of this overcapacity and lack of confidence by budget conscious consumers. We will never spend…repeat…. never spend like we once did. We have leaders who live for the moment and who believe that there should be equality of results, not opportunity. Our only hope is a new Congress in 2010 and new leadership in Washington in 2012,” concludes Banmiller. 
 Jeremy Shackeford of Susquehanna Bank agrees with Federal Reserve Chairman Ben Bernanke’s projection that “we will continue to see modest economic growth (in 2010) -- sufficient to bring down the unemployment rate, but at a pace slower than we would like.”
 Shackeford points out that the economy is expected to expand 2.6 percent in 2010, according to the median forecast of 58 economists surveyed by Bloomberg News in December.
 “Understanding that unemployment is a lagging indicator, when we can see a consistent creation of jobs, that will be the greatest indicator of a sustaining recovery in motion,” says Shackeford.
 “Both major political parties agree that getting Americans back to work is of the utmost importance right now. They also agree the way to do that is to create the right incentives. There may be some opportunity to do this by making investments in significant infrastructure improvements. America's small businesses could benefit from this as well, provided they have access to capital and credit so they can help jumpstart job creation and share in long-term growth.
 “Conditions, though, are still far from normal,” adds Shackeford, “with central banks keeping interest rates at record lows in an effort to stimulate borrowing and stoke the economy. With widespread signs of recovery, there are still a number of things to be concerned about, from the timing of the removal of federal economic support systems, to a sudden gain in the strength of the dollar strength and aggressive inflation.
 “Though economic risks may not be balanced, the trek toward lasting economic recovery may be well underway. Consumers everywhere seem a bit more confident, though this tumultuous economic experience has made many consumers and small businesses much more aware. It has reinforced the importance of financial literacy and responsibility,” Shackeford believes.
 “To make a prediction for this year is probably more confusing than in the past, but having been in the financial services profession since 1958 I’ve learned to constantly adjust and modify our asset allocation for our clients,” says Stanley H. Molotsky of The Molotsky Tax Advisory Group, LLC.
 “It seems because of the balances of business in Southern New Jersey, we should not, and have not been as hurt as some of the other parts of the country.
 “We look at 2010 as being both challenging and exciting. There are going to be tremendous opportunities to make money in 2010 if you are positioned properly.
 “I can’t remember a time since I began my career…when it was more crucial to protect what we’ve earned than it will be over the next 12 months, Molotsky says.
 Jeffrey J. Saline, President of Saline Financial Solutions finds himself in agreement with one of the best-known financial investors of our time, Warren Buffett. “I see housing starts and permits as one of the leading economic indicators. There are so many ancillary industries impacted by the residential housing market beyond real estate and construction. They include the manufacturing of hardware, plumbing, appliances, cabinets, windows, doors, glass and other like products/materials. Equally as important is the housing indicator’s impact on truck and rail transportation, food and beverage, banking, insurance and legal services,” says Saline. 
 “When it comes to New Jersey, I believe the new state administration needs to be primarily focused on our tax structure. With a 7% sales tax, one of the more progressive income tax rates and the highest real estate taxes in the U.S., Governor Christie must make this a priority. By consolidating school boards and administrations plus having municipalities move towards a greater sharing of services, this could have a positive impact on the budget and the ultimate goal, a reduction in taxes for both the businesses and residents of New Jersey,” adds Saline.
 “As for South Jersey, the biggest challenge for the Christie Administration is the deterioration of the region’s greatest industry—Tourism and Gambling. With the growing number of casino licenses outside of New Jersey yet within driving distance, we are losing what was at one time the East Coast’s only gambling destination. It seems that we may no longer be able to stop the drowning of Atlantic City’s visitors without a major campaign to regenerate the interest of tourists. Unfortunately, this will impact many of the South Jersey shore towns and cannot be understated in importance to the economy,” concludes Saline.
 “In 2010, we expect a modest (by historical standards) recovery in the U.S. economy from what was the most severe recession since the 1930s. Our forecast is for economic growth (as measured by real GDP) in the 3 to 4% range for the full year 2010, with stronger 3 to 5% growth in the first half and slower 2 to 3% growth in the second half,” says Ted Massaro of M-Financial.
 “The question is what will continue to push the recovery forward; the obvious choice is the consumer, which accounts for about 70% of GDP. But history shows that business spending, housing, and more recently exports have led the way out of recession — not the consumer.
  “Our view is that business spending, fueled by robust export opportunities, intense inventory restocking, low financing costs, and solid balance sheets of non-financial companies could drive GDP in 2010, while the consumer contributes modest growth,” says Massaro.
 “While consumers still face a heavy debt burden, businesses generally have good balance sheets. Corporate profits have accelerated at a record-breaking pace since the fourth quarter of 2008. Profits have been boosted by cost cutting on everything including employment, advertising, capital spending, travel, inventories, and more. The impact of aggressive cost cutting is being magnified by the return of revenue growth. An unprecedented globally synchronized rebound is lifting sales for corporations.
 “Obviously,” Massaro adds, “there are no guarantees as to what the future will bring and this forecast precludes any unforeseen adverse situations, like further escalation in overseas wars, militant attacks or other geopolitical events.”
  William C. Dunkelberg, Chairman of Board Liberty Bell Bank and Chief Economist for the National Federation of Independent Business believes that “the next bubble that appears could be in U.S. Treasury bonds.  The financial crisis precipitated a “flight to safety” that drove Treasury prices very high and yields very low.  On one particular day, the yield on some Treasury securities turned ‘negative,’ meaning that we were willing to pay the government to borrow our money.  Investors just wanted the safety of the government guarantee.  Even Fannie and Freddie securities did not do that.”
  “Treasury yields today are still too low as the Fed has promised to keep rates low for the indefinite future.  When yields on Treasury securities become priced in a more normal market, Treasury bond prices will fall.  The bonds that investors paid $99 (per $100 of face value) for will be selling for less than $95 as yields rise.  This will produce a capital loss and when billions of dollars are involved, the losses are substantial,” says Dunkelberg.
  Dunkelberg also believes that interest rates are going higher this year. “The reason is simple,” he says, “no bank can make a loan unless somebody is saving money.  Banks can lend money to consumer and private firms or to the government which will pay any interest rate it needs to for its funding because taxpayers pay the interest cost, not the government.  The government always wins in competition for funds.  This is called “crowding out” of private borrowing and spending.  Federal deficits are now monumentally high, and states and even cities are in need of borrowed funds.  They are competing for the savings of consumers.” 
  “In years past, we have been able to borrow the savings of the Chinese or other savers, but that is wearing thin with them.  If we have to fund trillion dollar deficits domestically, interest rates will rise indeed as the government competes with home buyers and firms for the available savings pool.”
   “The government has no money,” Dunkelberg points out. “it only has our money, which it takes through taxes and borrowing (selling Treasury debt to us or other savers around the world).  We must pay the interest on the debt.  Last year, the per capital bill was about $800 per man, woman and child.  We paid that on tax day, April 15.  Interest rates were low then, but as old debt matures, it is refinanced with more expensive debt.  And we are on course to double the debt in a few years from $6 trillion to $12 trillion.” 
  “Do the math:  if the average rate on Treasury debt is 5%, we need .05 x 12 trillion = $600 billion.  Divide this by the population, 330 million to get the per capital cost.   This must be paid every year out of your paycheck (or borrowed from somewhere).  It is not a pretty picture,” concludes Dunkelberg.