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Mid-year Economic Forecast

Carmex

What to expect for the rest of the year in your industry

Nearly six months into the Trump administration, the U.S. economy remains on a similar path to most of the Obama presidency. Steady – but slow – growth.

The U.S. gross domestic product only grew 1.4 percent in the first quarter, after a meager 2.1 percent gain during the fourth quarter of 2016. Second quarter GDP will be announced near the end of this month.

Job growth in the U.S. has remained steady, but not spectacular. The U.S. economy added 2.2 million jobs in 2016, an average of 187,000 per month. For the first half of 2017, the U.S. economy added nearly 1.1 million jobs, an average of 179,500 per month.

The sluggish GDP growth and steady job growth have occurred as the unemployment rate has reached extremely low levels.

The U.S. unemployment rate is now at 4.4 percent. It reached 4.3 percent in May, which was the lowest it has been since May 2001, four months before the Sept. 11 terrorist attacks. The unemployment rate in Wisconsin is even lower, at 3.1 percent, its lowest level since October 1999.

But while the low unemployment rate is great for workers and the economy, it has not translated into more robust economic growth.

The low unemployment rate could be a sign the economy is reaching the peak of its long post-Great Recession expansion period. If the labor market is essentially fully employed, it could be difficult to achieve greater economic growth. Several employers have said they are struggling to find the workers they need to grow their businesses. With the baby-boom generation moving into retirement and unemployment so low, it’s not surprising that good help is hard to find.

“The economy can’t stay strong if labor availability is weak,” said Kurt Bauer, president and chief executive officer of Wisconsin Manufacturers & Commerce. “Wisconsin needs to attract labor from other states and abroad in order to grow our economy.”

Hiring has improved in Wisconsin during the first half of the year. The state added 24,000 private sector jobs during the first five months of the year, after only adding 11,590 private sector jobs in all of 2016. But the state lost 1,700 private sector jobs in May, according to preliminary estimates.

The shortage of labor should result in rising wages, which would help boost the economy. But wages have only increased modestly. Private employee wages in the U.S. are up only 2.5 percent year-over-year.

“A crucial measure of how far from full recovery the economy remains is the growth of nominal wages (wages unadjusted for inflation). Nominal wage growth since the recovery officially began in mid-2009 has been low and flat,” according to a recent report from Washington, D.C.-based Economic Policy Institute. “This isn’t surprising – the weak labor market of the last seven years has put enormous pressure on wages. Employers don’t have to offer big wage increases to get and keep the workers they need. And this remains true even as a jobs recovery has consistently forged ahead in recent years.”

“It will take wage growth of at least 3.5 to 4 percent for workers to begin to reap the benefits of economic growth – and to achieve a genuine recovery from the Great Recession,” the EPI report states.

In Washington, Trump and Republicans in Congress are eager to approve a tax reform package they say will increase economic growth. Trump also wants to advance a major infrastructure improvement plan. But both the tax reform and infrastructure plans remain on hold as Republicans in Congress continue to seek an agreement on how to repeal and replace the Affordable Care Act. Business leaders are watching closely to see how those issues play out.

For more insight about the macroeconomic outlook for the second half of 2017, BizTimes Milwaukee editor Andrew Weiland recently spoke with Scott Adams, a professor and the chair of the economics department at the University of Wisconsin-Milwaukee. The following are excerpts from that interview.

BizTimes: The U.S. unemployment rate is 4.4 percent. The unemployment rate in Wisconsin is even lower, at 3.1 percent. But overall economic growth remains modest. Is the unemployment rate something of a headwind at this point? Does it indicate a lack of people available to bring into the labor pool and therefore, a lack of opportunity to increase economic growth?

Adams

Adams: “The combination of the low unemployment rate and slow growth is puzzling economists. One thing that strikes me is wage growth is pretty low as well. When you have unemployment rates that are so low and wage growth that is so low, to me it indicates that workers aren’t moving around as much as they should be. Perhaps workers are reluctant to move around or ask for higher wages because they recently lived through the worst recession of their lifetimes. Perhaps there’s a little bit of stagnancy among the workers. That, in turn, hurts productivity, keeps their wages low. That might be an explanation why we have this unusual result. You also have that in the (Consumer Price Index), you have inflation remaining low as well. All of this suggests that everyone is maybe still fearful of losing their jobs.”

BizTimes: It sounds like you think the Great Recession is still having a psychological effect on the workforce. I know my grandparents never forgot the Great Depression. They would tell stories about it and it influenced their behavior. They were very frugal. Is the Great Recession having a similar effect on our generation?

Adams: “Absolutely. Other economists have said the same thing, but that’s my take on what’s going on.”

BizTimes: We hear a lot from business owners who say they cannot find enough people to fill open positions. We hear talk about a skills gap between those who are seeking jobs and the skills required for available jobs. But isn’t it bigger than that? Especially in Wisconsin, aren’t we faced with an actual shortage of people, a human gap, not just a skills gap?

Adams: “People have been talking about the skills gap for decades. I just think to some extent, employers are reluctant to pay for the type of workers to fill those positions. Employers would more than happily pay foreign workers to do these jobs who might accept a lower wage than the older workers who are trying to get back to the jobs they once had. I think there’s some age discrimination going on here, as well. If you have a skilled worker with the experience and the tools necessary to do the job and is 50 years old, the company might be reluctant to hire that worker. But I also think that training takes some time to catch up to the skills that are needed. What we see now is the emergence of the importance of soft skills, like personality, the ability to communicate, leadership skills. I think employers are increasingly looking for people who have a technical skill but are being fairly picky, so they are leaving some positions unfilled maybe because they are not finding the people with the soft skills to fill it, as well.”

BizTimes: Why do you think employers are unwilling to pay people more?

Adams: “If you can hold out and think you can hold out for somebody that’s cheaper that can do the same job and you have some inventories, which might be the case with slow economic growth, you’d be willing to take that chance. Now if the economy starts growing faster, I think some of these things will take care of themselves.”

BizTimes: Isn’t it incumbent on the employee to demand and seek higher wages?

Adams: “I think if you see more people moving around the country, if you see workers having a little bit more power in the relationship, maybe you wouldn’t see this happening. But if employers are still able to get away with paying lower wages, then they will.”

BizTimes: What about the human gap? Does a state like Wisconsin, which has seen slow population growth, need to find new ways to attract workers to fill these jobs? How do we attract more talent and labor to fuel our state’s economy?

Adams: “It’s not just Wisconsin. The states around us are experiencing slow population growth. Part of it is demographics. You have fast growing Hispanic populations in the United States and you just don’t have a large Hispanic population here. This is not really a place that has a large influx of immigrants. The demographics are working against us there as well. We have fewer young people in the state than in the past couple of decades. The high school population in the state is low, as well. That’s going to reduce the output of the university system. The university can attract students from out of state and try to keep them. That’s mostly an issue for (UW-) Madison. But the students that go to Madison may have plans to go elsewhere when they graduate. They may plan to move to large population hubs. Milwaukee can certainly get some of them, but a lot of them are interested in leaving the state. I think we’ve done some things to make the state attractive. The taxes have been kept relatively low. Maybe they could be lower, but I think the taxes are reasonably low. We’ve done the best we can to improve the quality of life in the state, but we can’t change the weather. I think we are just sort of tied to the demographics. I don’t know what else we might do to attract more people to the state.”

BizTimes: Turning to national economic policy, what do you expect the Fed to do with interest rates the rest of the year and what impact will it have?

Adams: “I anticipate they will continue to be cautious and they will continue to raise interest rates slightly. I don’t see an immediate impact of those actions. As long as the economy is growing and as long as inflation seems to be relatively under control, I can see them continuing to raise the interest rate. That way, if we end up in another recession, the Fed will have some levers to pull and they could reduce the interest rate to try to spur the economy. I think they want to get the interest rate at a more manageable level so in the future, they will have that option. But I don’t see a lot of big effects on the economy of their action in the coming years.”

BizTimes:  Any thoughts on the federal health care debate?

Adams: “I don’t foresee any real changes in health care coming anytime soon. Republicans are in two factions. One wants to reduce the government footprint as much as possible and they are not satisfied with the bill that’s coming out. And then you have the group of Republicans who also are saying, ‘This bill isn’t particularly good for my constituents because it’s going to throw people off of Medicaid and they will flood the hospitals. This isn’t going to reduce health care costs.’ I think the Republicans themselves aren’t at this point in a position to agree on something to move it forward. The current bill that’s put out by the Senate is just a complete disaster. It’s going to lead to people becoming uninsured. It’s not going to do a thing to lower health care costs. It might even increase them because you are going to have people showing up at the emergency rooms more. And, I think all of this is a disguised tax cut for the very wealthy. Time and time again tax cuts for the very wealthy do not do a whole lot to spur economic growth. I think economists are largely in agreement on that. From a health care standpoint and an economic standpoint, what the Senate has put forward is just a terrible idea.”

BizTimes: Speaking of taxes, President Trump and Republicans in Congress have also promised major tax reform. Do you think that will get done, and if so, what impact will it have?

Adams: “They have certainly hurt their political capital with their failure to get anything done to this point on health care. So I am not optimistic they will get anything done on the tax code. I anticipate six months from now talking about the same thing. The last time we had major tax reform, we had a long bipartisan effort and a president that was willing to work with both parties. We just don’t have that political climate right now, so I’m not optimistic they will get anything done. And again I don’t think the Republican Party itself is in agreement on who should have the tax cuts and how big they should be. You will have a faction that will say, ‘We should reduce taxes on the wealthiest.’ You will have a faction that say, ‘We should reduce taxes evenly across the board.’ You are going to have them arguing with each other.”

BizTimes: Is Trump’s goal to bring manufacturing jobs back to the United States realistic?

Adams: “You can’t change worldwide economic forces. If you could reverse it, that’s going to lead to higher priced goods and consumers are going to have to spend more. You can’t fight that. What you can do is try to adjust. Where you have seen success is to attract and try to fill jobs in a more higher tech manufacturing sector. But that goes back to the human problem you said before.”

BizTimes: Big picture for the second half of the year, where do you think GDP is going to be?

Adams: “Continued slow growth. The one bright side is consumer confidence is up and we are a consumer-driven economy. But it’s still sort of fluctuating. It seems the economy will continue to have this slight, steady, slow growth. Wages will kind of stay put, unemployment will stay low. We’ll wait until consumers and workers gain even more confidence and are able to shake the economy up a little bit and get it out of its stagnant state.”

BizTimes: So GDP at two-some percent, probably?

Adams: “Oh, yeah. I don’t think anything beyond that is expected.”

BizTimes: Is the low unemployment rate at this point a headwind?

Adams: “I don’t know if in-and-of-itself it is. But along with low wages, it’s a signal that something else is going on that is keeping the economy flat. The number in-and-of-itself isn’t a headwind, but what is causing it might be a headwind.” n

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