Editor’s note: The annual BizTimes Mid-year Economic Forecast special report always includes predictions from a noted economist or wealth manager about the outlook for the rest of the year. This year’s featured Mid-year prognosticator is Richard “Dick” Marcus, associate professor of business at the University of Wisconsin-Milwaukee.
BizTimes: What do you say is the biggest driver of economic activity?
Marcus: “In real estate, the three most important words are location, location, location. In economic activity, absolutely everything depends on jobs, jobs, jobs. In January 2008, when President Obama was inaugurated, we had 138 million employed, based on U.S. total nonfarm payroll data. The number of nonfarm workers fell to a low of 129.2 million in February 2010. After that, employment has risen, but through May of this year we had only reached 133 million employed. While employment is growing, it is growing so slowly that fewer people are working now than we had in 2008.”
BizTimes: What happens when an economy has fewer workers?
Marcus: “Economists think in terms of production functions. The output of an economy depends on the amount of inputs and the productivity of those inputs. When that amount of labor falls, output falls unless there is a sufficient improvement in the productivity of the workers that remain or an increase in other inputs.
“We measure output as real GDP, which is the gross domestic product adjusted for prices. Real GDP in the first quarter of 2008 was $13.3 trillion and has virtually stayed unchanged as it stands at the end of the first quarter of 2012 at $13.5 trillion. We have few workers, but increases in capital and productivity have kept the output relatively unchanged. With no real progress over several years, this leads to the impression of a prolonged recession.”
BizTimes: So, are we in a recession? If not, do you see a double-dip recession ahead?
Marcus: “The National Bureau of Economic Research has a subgroup of economists on the Business Cycle Dating Committee. They declared that the last recession went from December 2007 to June 2009. They have been essentially correct, as employment has been slowly growing from mid-2009. So we are not in a recession. But we are in the slowest post-World War II recovery on record. In that sense, we are in a period of no discernible real economic growth. That would be better called economic stagnation with economic growth below 3 percent for years.
“The economy expanded at a tepid 1.9 percent growth rate in the first quarter of 2012. It is growth, but is virtually imperceptible to most people. I expected a growth rate of about 2 percent for 2012. Growth is likely to be even slower in the second quarter of this year, but should be above a 2 percent annual rate by the fourth quarter. The mid-year pause that we’ve seen the last two years appears to be here again. I do not foresee a recession when we are growing, even if the growth is barely noticeable.”
BizTimes: What leads you to your prediction of just 2 percent growth, when most economists predicted 2.5 or 3 percent?
Marcus: “Economists divide the economy into four huge sectors: consumption, business investment, government and international. Growth in these four sectors spells economic growth, but declines in one or more of these sectors foreshadow weakness.”
BizTimes: The first sector you mentioned was consumption. Isn’t consumption supposed to be about 70 percent of the economy, and isn’t that growing?
Marcus: “Consumption is indeed the largest sector, but it cannot grow robustly because Americans face declining real per capita income. Real per capita GDP in January 2008 was $33,176. That has declined to $32,613 today and has been essentially flat for over a year. People tend not to spend more when their income isn’t rising. Ask yourself, has your real income risen? Some economists note that consumers have been paying down their debt, so that they should be able to spend more. While that is true, it is hard to spend more when consumers are still unsure whether they might be laid off. Annual consumption growth is a mere 1.6 percent. It is hard to see consumption suddenly improving.”
BizTimes: But aren’t car expenditures booming?
Marcus: “Certainly car sales at Ford, GM, and Chrysler are up over the last year by 11 percent, 13 percent and 30 percent, respectively from the same time a year ago. But these numbers are up from very low levels. People have delayed replacing their cars for years. At some time, they have to replace cars when they are no longer economical to repair. When income doesn’t rise, and you spend more on autos, you have to cut back on other things.”
BizTimes: Then what about the investment sector?
Marcus: “Investment means expenditures on capital goods, which are things like purchases of machine tools or constructing new stores. The measure to follow is gross private investment, which has been rising faster than overall GDP. Business investment depends on (1) expectations for more demand; and (2) expectations about future costs. Expectations about future demand are slowing worldwide. Even though fuel costs have come down some, other costs are now seen to be looming.
“Businesses fear that taxes will rise substantially in 2013 as the Bush tax rates lapse. They also fear higher health care costs on their employees. Recently, inventories have been rising and corporate profits are starting to go in reverse. Corporate profits actually fell 4.1 percent in May alone. It is unlikely demand expectations will improve greatly and very unlikely that Washington, D.C., will give any clarity on future taxes until after the November election. Investment is not likely to grow much this summer.”
BizTImes: What about the government sector?
Marcus: “Across the country, communities and states have had to be more frugal. State and local government expenditures have contracted from 2011 to 2012. Even the unprecedented spending of the federal government is not expected to grow that extensively in 2012, as most legislation is at a standstill and some defense programs may actually contract. From the first quarter of 2011 to the first quarter of 2012, federal expenditures grew just 1.9 percent. This adds to GDP, but I expect the pace to slow through 2012. With state and local about twice the size of federal expenditures, government expenditures are likely to be nearly flat, contributing very little to GDP growth.”
BizTimes: Then last, I suppose, is the international sector.
Marcus: “The international sector is measured as net exports, which are export expenditures minus imports. Net exports is negative and have been a net drag on GDP for years. With a recession going on in Europe surrounding the problems in Greece and elsewhere and the slowing growth in China, exports are unlikely to be stellar. Furthermore, the U.S. dollar has been rising. This makes U.S. goods more expensive. I expect both import and export growth to be less robust in 2012. At any rate, the International sector will have a net depressing impact on GDP growth.”
BizTimes: So, what’s your bottom line?
Marcus: “We will still see meager growth. The four sectors of the economy are growing at rates well below their potential and even below the rate last year. The post-W.W. II average GDP growth rate is 3.3 percent, but we are stuck with slowing consumption growth, abruptly slowing business investments, slowing government expenditures and the continuing drag of the international sectors. The four sectors point to barely perceptible growth of 2 percent this year that some call stagnation.