Although the national conversation of 2014 was dominated by the headlines related to police use of deadly force, racial tensions, the Middle East, immigration reform and general global chaos, an equally important news story simmered in the background, often with little fanfare.
That story is the economic recovery. The U.S. economy has recorded 58 consecutive months of private sector job growth, creating more than 10.9 million new jobs.
The national unemployment rate has fallen to 5.8 percent. The U.S. stock market stands near record highs. Inflation is low. So are interest rates. The price of gasoline has plummeted. And the U.S. dollar remains strong.
The U.S. economic expansion has continued for 22 quarters. Real gross domestic product (GDP) grew 5.0 percent at an annual rate in the third quarter of 2014 — the strongest single quarter since 2003, according to the third estimate from the Bureau of Economic Analysis, following an increase of 4.6 percent in the second quarter. The upward revision indicates that the economy grew in the third quarter at the fastest pace in more than a decade. Manufacturing activity in November remained near 10-year highs, and consumer confidence has returned to levels prior to the Great Recession.
All of those factors help explain why surveys of business leaders in the Metropolitan Milwaukee Association of Commerce, the Council of Small Business Executives and readers of BizTimes.com are projecting strong increases in revenues, profits and job creation for 2015.
Perhaps the most telling statistic of all is that the volume of steel shipped into the Port of Milwaukee in 2014 surpassed 179,999 metric tons, the second-highest annual steel tonnage since 1970. That steel is sure to put a lot of folks back to work in southeastern Wisconsin’s factories in 2015.
BizTimes recently conducted its annual macroeconomic interview with Michael Knetter, Ph.D., an economist and president of the University of Wisconsin Foundation, in advance of the Northern Trust Economic Trends Breakfast. The following are excerpts from that interview.
BizTimes:
Before we focus on the year ahead, let’s briefly look back at the year that was. Now that it’s in the books, what were the economic highlights of 2014? What were the low lights?
Knetter:
“The growing momentum in real GDP growth (how about the 5-percent annualized Q3), falling unemployment rates and rising consumer confidence in the U.S. bode well for 2015. The collapse of oil prices and the turbulence in Russia and other emerging markets also stand out. The oil price decline is now more of a mixed bag for the U.S. given our emergence as a larger producer, which of course played some role in softening prices. The decline of the labor force participation rate lingers as a concern. How much the economic progress in recent years is a result of shifting consumption forward in time through extremely aggressive monetary policy remains to be seen. While a significant segment of the population continues to muddle or struggle, the overall macro recovery from the financial crisis is extraordinary when compared to other countries.”
BizTimes:
As the New Year begins, the stock market is at record highs. Energy prices have fallen. The unemployment rate has fallen. Job creations are rising. Inflation is tame. We are seeing multiple bullish projections from business leaders about 2015. Are you bullish about the year ahead? If so, why?
Knetter:
“I am bullish due to the various sources of momentum you cited. If the Fed is able to gently pull back ahead of foreign central banks, which now seems likely, the U.S. dollar should continue to strengthen and boost consumer purchasing power. The main threats to the optimistic scenario for the U.S. to me center on geopolitical risks in the Middle East or Ukraine. As Russia faces severe challenges, the situation in that part of the world could become increasingly unstable. We also need China to achieve a soft landing and recovery for our own sake. A weak or unstable China is not good for anyone right now.”
BizTimes:
Why has the U.S. economy bounced back, while the economies in Japan, China and Europe have floundered?
Knetter:
“The stronger incentives and relatively greater financial transparency of U.S. economic institutions enable us to be more effective than most countries at resolving distressed situations. I remember watching the Asian Crisis of the late 1990s and hearing about how long productive assets would be tied up in legal disputes in the wake of the crisis. It is good to have a system that resolves distressed situations like bankruptcy quickly and effectively. For a while it seemed like United Airlines went bankrupt every couple years but the service never changed through the whole process (which may explain the bankruptcies, but that is another story…).
“However imperfect the U.S. economy may be, it takes a model to beat a model. Japan’s lack of transparency and insular nature will make recovery there very difficult. They have been in the doldrums for decades now. I stopped reading the articles claiming that they were reforming their financial sector 20 years ago. It remains opaque, and that is a huge problem. In Europe, taxation is very high which reduces incentives to work hard and take risk. They also have a one-size-fits-all monetary policy that cannot accommodate the varying needs of the disparate economies. China appears to be reaching the limits of its rapid growth stage and seems due for a large correction.”
BizTimes:
It seems to me that the one component of economic recovery that has been lagging is household incomes, which have not kept pace. Do we need to see them rise before we attain a full recovery?
Knetter:
“This is a matter of semantics. Recovery in the aggregate may have begun in earnest, but recovery is also in the eye of the beholder, and the economic trends of the last 25 years have not been favorable to the less skilled workers in the U.S. economy. Many people in the U.S. are not feeling ‘recovery’ at all but rather continued stagnation. We do need to pay attention to what is happening in the lower half of the income distribution. People who are willing to make an effort to get ahead need to be able to equip themselves with the tools to succeed. There are too many pockets in our society where young people’s prospects are simply too bleak. And unfortunately, we are far from a consensus about how you fix that problem. In addition to economic inequality, the unfortunate incidents in Ferguson and New York City (among other things) have added a racial overlay to America’s inequality challenges. These are very unhealthy trends for the nation as they will tend to amplify the already divisive flavor of our politics, making it even more difficult to find the compromises essential to move us forward.”
BizTimes:
The U.S. dollar remains remarkably strong. Why is that a good thing? What are the downsides to that?
Knetter:
“All else equal (i.e., all other prices in the economy, etc.), a strong dollar is good for consumers (because imported goods are cheaper and this puts some restraint on domestic prices as well) but bad for producers (your goods are relatively more expensive to foreign buyers, which shifts demand away from you — think about the wine industry). Most of us are both producers and consumers so it is almost a wash. For those who are almost exclusively consumers, college kids or retirees, it is mostly good news. Spring break in Mexico (or Sochi) is on sale! Right now. the stronger dollar is reflecting the underlying relative strength of our economy and our recovery. That is a good thing. I’m sure the Russians wish things were reversed.”
BizTimes:
From a competitive standpoint in a global economy, what are Wisconsin’s strong points? What are Wisconsin’s weaknesses?
Knetter:
“We have a very good workforce and the potential for an even better one if we could attract or grow more technology and R&D-intensive companies in our state that would use the relative abundance of college graduates we produce. We are fairly well-diversified with a strong presence in both manufacturing and agriculture, some strength in financial services and health care (especially for dealing with aging populations which is, perhaps unfortunately, becoming one of our areas of relative abundance — reflecting our difficulty in keeping young people here), and tourism in the northern tier which also benefits overall quality of life for people throughout the state. It’s still a great place to live if you can handle the winter. Our weaknesses are being a little heavy in manufacturing in the ‘70s and ‘80s so we have had to manage the globalization-induced contraction of that sector, which has put some strain on our fiscal situation. In order to sustain our public sector, which was generously funded in the heyday of manufacturing, Wisconsin taxes have increased relative to other states over a period of time when needed to attract new businesses. We also lack a major hub airport that would make this an attractive location for businesses with global reach. Between our transportation challenges, weather and taxes, it has been difficult for Wisconsin to reinvent itself in the human capital-intensive industries that are driving growth elsewhere. They can be anywhere on the planet, and people are voting with their feet.
“We should think differently about how we define success for our state. Everyone seems to think in terms of net job growth as the Holy Grail. That may be true to a point if you are trying to reduce temporarily high unemployment. But beyond that, it is not about ‘job growth’ but rather about the quality of jobs we have in our state. Job quality defines a large part of a person’s or family’s quality of life. Frankly, I’d rather we had 5 million people in our state than 7 million. Who wants those extra 2 million people and their cars on our roads or their boats on our lakes? We already have Illinois to the south! Thinking about job quality and overall quality of life instead of the job quantity and job growth might make us think more clearly about some important policy issues. We might worry more about how we help our existing citizens do better and less about what it would take to get somebody to move a business here from Silicon Valley. While it is true that the latter can help achieve the former, it may not be the surest path to doing so.”
BizTimes:
Any final thoughts for things we could do differently in 2015 and beyond?
Knetter:
“If we were ever going to think about a carbon consumption tax, the day has arrived. I have no doubt that burning of carbon fuels creates negative externalities, it is only a question of how big they are. The sharp decline in the price of oil may quickly undo some of the conservation habits that high oil prices encouraged. Our ability to wean ourselves off oil can have many geopolitical benefits for us. So why don’t we swap out some taxation of people’s labor effort or income for taxation of the burning of carbon? Or use net new revenue from a carbon tax to rebuild some of our infrastructure, which could include public transportation options? Of course, the new energy producers would be unhappy about a carbon tax, so this is almost surely wishful thinking. It will be interesting to see if anyone bothers to propose something so economically sensible for the nation but politically audacious.
“The second-best opportunity is to enact a plan to gradually increase at predictable future dates the retirement age at which various entitlement benefit levels can be reached to deal with the demographic and aging challenges we will soon be facing. The increased longevity of a rapidly growing elderly population must be financed somehow.”
