Taylor predicts ‘radically’ higher interest rates, inflation

The weather outside was dreary. The comments inside were frightful.

John Taylor told more than 50 members gathered for a Feb. 4 monthly meeting of the Greater Fort Smith Homebuilders Association that the near term economic picture will include higher commodity prices, continued unemployment woes, inflation and “radically higher interest rates.”

Taylor, senior vice president of John Taylor Financial-Sterne Agee and a member of the board of directors at Fort Smith-based Benefit Bank, provided handouts that showed the futures market predicting the prime interest rate would rise in the next 18-24 months from 3.25% to 6.63%.

The thought of higher interest rates had to be less then welcome news for a group of folks who depend on stable and growing home sales.

“I don’t know anyone in their right mind who doesn’t expect interest rates to rise,” Taylor said. “And there’s just one reason behind that: deficits and this deficit spending.”

President Barack Obama recently unveiled a record $3.8 trillion 2010 federal spending budget that comes with a record $1.56 national deficit. The 2010 deficit will be 10.6% of GDP, up from 9.9% in 2009. Obama says spending required to pull the country through the recession is necessary and vows to make deep deficit cuts once economic conditions improve. Spending and deficit opponents are saying the continued deep red ink will result in more painful economic conditions in the near future.

Taylor was critical of current and past efforts by the government to stimulate the economy.

“If you want to raise (government) revenue, why don’t you make it easier for people to make money?” Taylor quizzed.

Taylor’s prediction of higher future commodity prices didn’t take long to find supporting evidence. The same afternoon Taylor spoke to the homebuilders, Fort Smith-based Baldor Electric Co. had the following note in their fourth quarter earnings report: “We are starting to see increased costs for steel, copper and cast iron, our largest raw material purchases. While they won’t have an impact on us in the first quarter, we expect they may lead to a sales price increase in the second quarter.”

Being a “durable goods manufacturing town” could cause the potentially dire economic consequences to be more pronounced in the Fort Smith region, Taylor predicted. Consumers around the country don’t buy durable goods — air conditioners, refrigerators, doors, windows, etc. — when they fear for their job or if the price of those goods rise, he explained.

“When you throw rising prices into a high unemployment situation, I don’t think that’s a good situation (for the Fort Smith regional economy),” Taylor told the group. “When Wal-Mart starts laying off folks at their headquarters office, you know things are tough out there.”

Keith Lau, a Realtor with King Realty Group and an area developer, didn’t think Taylor was too negative with his outlook.

“The thing that worries me the most is the lack of jobs and the lack of income. … If that (Fort Smith metro unemployment rate) stays high and we have these other things … ,” Lau said, finishing his sentence with a shoulder shrug.

Taylor ended his comments on a positive note, saying the U.S. economy may be troubled, but “there’s no other place in the world I’d rather live.”