Companies closed plants. They eliminated jobs. They left vacant positions unfilled. They froze salaries. They cut travel budgets. They postponed investments in IT equipment. They slashed marketing budgets. They put staff development programs on ice. They demanded price concessions from vendors. They increased the share employees must pay for health care insurance.
There is little blood left to be squeezed from these Wisconsin turnips. They did everything they had to do to survive the Great Recession of 2008-2009.
The recovery began in 2010 and hopefully will pick up speed in 2011. Boldly, Wisconsin must go forward.
Thus, the theme for this year’s Northern Trust Economic Trends Breakfast presented by BizTimes Milwaukee is “Back to Business.”
Economist Michael Knetter, president and chief executive officer of the University of Wisconsin Foundation, returns to provide the macroeconomic overview for the attendees of the breakfast. Each year, in advance of the breakfast, I grill Knetter about which directions the economic winds will blow.
In sum, Knetter is predicting 4 percent growth in the U.S. gross domestic product (GDP) in 2011, which would result in improved job creation and lower unemployment and would signify healthier spending by consumers and increased production in our factories.
We saw evidence of the economic momentum building as the New Year rang earlier this month.
- The American automotive industry continues to recover, and that bodes well for Wisconsin manufacturers that supply automotive parts. General Motors Co. posted a 7.5-percent sales increase in the final month of the year to 224,185 cars and trucks. That number brought GM’s total vehicle sales for 2010 to 2.22 million, up from 2.08 million in the prior year. Ford Motor Co. reported a 6.7-percent increase in December U.S. sales to 190,976 vehicles. Ford posted a 19.4-percent jump in vehicles sold in 2010, the largest full-year improvement for any full-line manufacturer in the industry.
- Metropolitan Milwaukee ranks as the third-best net employment market in the nation, according to the latest Manpower Inc. Employment Outlook Survey.
- Automatic Data Processing Inc. said U.S. private-sector employment jumped a record 297,000 in December, signaling that the economic recovery is picking up its pace. The ADP index measures the payrolls of more than 500,000 corporate clients across the country.
- The national unemployment rate fell to 9.4 percent in December, the lowest since May of 2009, according to the U.S. Department of Labor. The Wisconsin unemployment rate has consistently tracked more than two percentage points below the national average.
The encouraging data is borne out anecdotally in surveys conducted for the BizTimes Economic Trends special report (see accompanying stories):
- Solid optimism was expressed by Milwaukee area businesses both for 2011 as a whole and for the year’s first quarter, according to a Business Outlook Survey conducted by the Metropolitan Milwaukee Association of Commerce (MMAC), with 76 percent of businesses surveyed forecasting sales increases for their companies in 2011, and more than half expecting job gains for the year.
- The members of the MMAC’s Council of Small Business Executives (COSBE) are even more bullish, with 89.5 percent forecasting gains in company revenues.
- Several key members of the Greater Milwaukee Committee’s board of directors are bullish about a rebound in 2011.
- Seventy-one percent of the readers responding at BizTimes.com say they expect increased revenues at their companies in 2011.
Of course, the news is not all rosy, and the recovery will not come without its speed bumps.
The housing market remains weak, and the commercial real estate market is certainly not booming. More pain is certain to be felt in the banking sector.
The Milwaukee region will lose three corporate headquarters in 2011, as Bucyrus International Inc. will be acquired by Caterpillar Inc. and Ladish Co. will be acquired by Allegheny Technologies Inc., while Wisconsin’s largest bank, Marshall & Ilsley Corp., will be acquired by the Bank of Montreal. No matter the spin, these are not positive developments for the region.
The following are excerpts from this year’s BizTimes interview with Knetter about the economic outlook.
BizTimes: U.S. corporations reported record profits in the third quarter. And yet America’s gross domestic product growth has been paltry, still less than 3 percent. What gives? How can that be?
Knetter: “Profits are the difference between revenues and costs. Revenue growth is likely closely tied to GDP growth. So, the extraordinary profit performance is likely due to extraordinary control of costs, some of which explains the high unemployment rate and large number of discouraged workers.”
BizTimes: Are America’s largest corporations really hoarding their cash, rather than hiring and ramping up production?
Knetter: “You can only ramp up production if you are confident demand will be there. I think firms are repairing their balance sheets. Who wouldn’t after the near death experiences faced by many companies in the recent crisis? To make matters more difficult, uncertainty about the direction of policy in health care, taxation and regulation has probably led many to defer investment decisions.”
BizTimes: For investors, where’s the smart money going these days? It certainly isn’t in real estate. The stock market was looking like a sucker’s bet until a nice little surge in December. What’s a poor boy to do?
Knetter: “The smart money these days is well-diversified. Should we be concerned about deflation or inflation? We could get either. I would encourage investors to take a careful assessment of their asset allocation and make sure they are comfortable with the mix across real estate, equities, bonds and other hard assets that might act as a hedge against inflation such as gold or commodities. I moved somewhat away from bonds over the last year and am fortunate to have done so. Regarding real estate, I wouldn’t be surprised if some great opportunities now exist, so I believe a part of your premise may be false.”
BizTimes: There has been a lot of talk about fears of inflation. When I look at it, to have inflation, you need to have rising demand to sustain the inflated prices. Wages are flat. The housing market is terrible. Aside from commodity prices, I don’t see any immediate inflationary forces in the short term. Do you?
Knetter: “I see no strong signs of inflation, other than the large increase in the Fed balance sheet. But we ought to watch that very carefully.”
BizTimes: Do you expect any progress in chopping down the unemployment rate in 2011? What will it take to bring the unemployment rate down?
Knetter: “Progress against unemployment is likely to be slow. We would need real GDP growth to be sustained at a rate above 3 percent per annum and net hiring to exceed over 200,000 jobs per month to begin to reduce unemployment. This will only occur if we see sustained increases in demand for consumption, business investment or net exports, or some combination.”
BizTimes: What kind of GDP do you foresee for the U.S. economy in 2011 and beyond?
Knetter: “I think growth will continue to gain traction this coming year to about 4 percent in real terms, provided there are no big unexpected shocks.”
BizTimes: The Obama administration is using quantitative easing to spark the economy. Will it work?
Knetter: “Technically, the Fed is using quantitative easing and the administration is using fiscal expansion via both the extension of the tax cut and increases in federal spending. Since we cannot observe the counterfactual scenario – i.e., what would the state of the economy be without these measures – it is hard to know if these things work, even ex-post. People clearly sense the limits of fiscal expansion as it is now widely recognized that government fiscal credibility affects the interest rate, given recent events in Greece and Ireland. Of course, this fiscal logic was used in reverse by the Clinton administration when Treasury Secretary Rubin advocated deficit reduction as an expansionary policy due to the positive effects lower interest rates have on the economy. I suppose it is possible that fiscal expansion has positive effects in some cases and negative effects in others. In the current environment, I believe we are at best shifting spending into the present a little bit and we will have to pay for that in the future.”
BizTimes: Looking back for a moment, you said last year that you believed the original Obama economic stimulus plan was necessary to avoid an even steeper economic crisis, maybe even a depression. Do you still feel that way?
Knetter: “I think it was needed at the time to stem the freefall in the economy and a very negative outlook by market participants. I also felt and still feel that the stimulus needed to be paired with a credible long-term plan to stabilize our fiscal condition. I think we have not yet delivered on the latter, and the health care bill may have taken us in the other direction, at least in the view of most market participants.”
BizTimes: Lets’ talk about the compromise tax package that Obama reached with Republicans. It extended the Bush tax cuts for two years. It extended unemployment benefits for 13 months. It raised the ceiling on when the estate tax kicks in. It provided a payroll tax deduction. Overall, what do you think of it?
Knetter: “Again, it is another near-term fiscal expansion that as far as I can tell is not paired with a credible long-term plan to stabilize the federal budget. Thus, I find it on balance disappointing. We keep doing the easy part – giving more away now – and avoiding the hard part.”
BizTimes: What is your assessment for the outlook for the Wisconsin economy? Can Gov. Scott Walker create 250,000 jobs in four years?
Knetter: “I think the Wisconsin economy in the near term will match the national recovery. Conditions are relatively good for agriculture and manufacturing, due to historically weak exchange rates and high overall demand for commodities. As for job creation, I think Gov. Walker would be the first to say that he does not intend to create 250,000 new jobs. I think he intends to do his best to help create an environment in which the private sector can create those jobs. I hope that political leaders of both persuasions and our business leaders can work together to achieve that objective, and we can all share the credit. Economic performance is the result of the interplay of the decisions made by every one of us. Nobody owns the economy or its ability to create jobs. Wisconsin’s greatest challenge is to unite behind a sensible set of principles for economic development. I hope our leaders from across the state can do that. Continued infighting between bureaucrats, politicians, labor leaders and business interests is one of our greatest obstacles to improved economic performance.”
