Although the U.S. economy has been in an expansion cycle for more than six years, many business leaders have complained that the economic recovery has been too weak. The average annual change in the nation’s gross domestic product has been only 2.2 percent since 2009. Economic expansions in the ’80s and ’90s were considerably more robust.
Nevertheless, one can’t deny that the nation has enjoyed a lengthy, sustained recovery from the Great Recession. The U.S. has had 70 consecutive months of private sector job growth, including the addition of nearly 6 million jobs over the past two years. In December, the U.S. economy added 292,000 jobs.
The U.S. unemployment rate, which peaked at 10 percent in 2009, is now down to 5 percent.
The housing market has rebounded from its Great Recession collapse and the commercial real estate market is hot, as construction cranes are up around the metro Milwaukee area.
Consumer spending is strong, boosted by lower gas prices.
Economists are predicting another year of growth in 2016, and most are predicting about 2.5 percent U.S. GDP growth for the year.
But just how much longer will the economic expansion continue? Of course it won’t last forever, and some signs of a slowdown are emerging.
The U.S. stock markets had a rough year in 2015 and are off to an awful start to 2016. The Dow Jones Industrial Average was down 2.2 percent in 2015 and the S&P 500 ended the year down 0.7 percent. It was the worst year for those indices since 2008.
The manufacturing sector, still a major part of the southeastern Wisconsin economy, is struggling. The Milwaukee-area PMI index has been in negative territory for nine months and several plant closings have been announced in the region lately. Manufacturers that do business overseas have been hurt by the strong U.S. dollar and weaker foreign economies.
While low oil prices are helping consumers at the gas pump, they have devastated the mining and energy industries.
Michael Knetter, Ph.D., an economist and president of the University of Wisconsin Foundation, said he thinks the U.S. economy is nearing the peak of this economic cycle.
“If this were a nine-inning game, I would say we appear to be in the eighth inning of the game,” Knetter said. “However, it is a close game and it just might go extra innings…growth is slowing for a variety of reasons, as we are nearing full employment and there is no strong upward pressure on prices. Our recovery from the financial crisis was very modest and the ‘landing’ for growth may be very soft as a result. We also need to keep in mind that as the growth in labor supply has slowed down, the natural rate of real GDP growth is closer to zero and it is easier for the economy to meet the technical definition of ‘recession,’ which is two quarters of negative growth.”
BizTimes Milwaukee recently conducted its annual macroeconomic interview with Knetter in advance of remarks he will give on Jan. 29 at the Northern Trust Economic Trends Breakfast presented by BizTimes Media.
President and CEO, University of Wisconsin Foundation
Past dean, University of Wisconsin School of Business
Former senior staff economist for former presidents George H.W. Bush and Bill Clinton
The following are excerpts from that interview.
The U.S. economy has been in a long growth period since 2009. But many business leaders have complained for years that it has been too weak. What’s your general take on the economic recovery?
“Economic recoveries since the 1990s have tended to exhibit slower growth rates than the recoveries of the 1970s and ’80s. Those earlier recessions were accompanied by abrupt supply shocks, whereas the more recent recessions often had significant financial dimensions. Compared to other nations, the U.S. has emerged reasonably well from the latest financial crisis. Given the substantial reduction in wealth experienced by households, it was fanciful to think private spending on consumption or investment could drive a rapid recovery.”
Will the U.S. economic recovery continue in 2016, or is it running out of steam? What can we expect from GDP in 2016?
“I think it is both of the above: I believe the recovery will continue, but at an even slower rate. The Fed has begun tightening, the strong dollar is already creating competitive headwinds for producers, and the labor market is nearing full employment, although it is possible the participation rate could move back up and, thereby, add to growth potential. GDP seems likely to inch upward, maybe 2 percent.”
As you mentioned, the Fed finally raised interest rates recently, for the first time in nine years. Was that a good move? Do you anticipate more interest rate increases in 2016? How will the interest rate boost impact the economy?
“We needed to leave the zero interest rate world at some point, and it is hard to argue with the first rate change made by the Fed. Because it was widely anticipated, it had little impact on the economy overall. I expect a couple more 25 (or maybe even a 50) basis point increases in the year ahead. In an election year, it seems unlikely that the Fed would tighten so much as to cause a contraction, so the timing and magnitude of any further rate action will be flexible. This will increase the cost of capital and potentially strengthen the dollar even further, depending on how other central banks react. Hence, the rate increases should begin to slow the growth in U.S. spending for most households and businesses, although people living off their savings will appreciate the higher incomes that may result for them.”
Manufacturing is a vital sector in southeastern Wisconsin and it appears to be struggling. Several major plant closings have been announced in recent months. The local PMI index has been in negative territory for nine consecutive months. What are the headwinds facing manufacturing and can they be overcome?
“The stronger dollar is a headwind for all tradable goods producers in the U.S. It often takes six to nine months for currency appreciation to begin to erode competitive positions, and that seems to be in full force now. Because Wisconsin has an unusually high fraction of jobs in manufacturing, this is a bigger issue for our state economy. A period of competitive pressure such as this can lead firms to take stock of how and where they do things, making plant closings and relocations much more likely. I am hopeful that the worst is now over.”
Gas prices haven’t been this low in years. That is clearly causing problems for some manufacturers, but shouldn’t that provide a boost to consumers?
“The collapse of energy prices probably had a negative impact on growth last year, as it caused a sharp reduction in investment spending for some of the newly emerging energy sectors. The sustained low cost of energy combined with a mild winter should now begin to allow for more discretionary spending or saving by consumers.”
As you said earlier, the strong dollar is a headwind for manufacturers. But is there an upside to having a strong dollar?
“In general, a strong dollar is good for consumers (imports are cheaper in dollar terms and domestic producers have to be more careful about price increases) and bad for producers (import competition is stiffer). For households that are only consumers, such as retirees, the strong dollar is mostly a good thing. For those who are both workers and consumers, it is probably a wash.
“It is worth noting that the strong currency is usually a signal of a relatively strong underlying economy. A currency strengthens when others want to acquire it, so it is a reflection that foreign firms and households find U.S. assets attractive. That is a good thing…but it has some second order adverse consequences noted above.”
The unemployment rate can’t get much lower, can it? Will the labor participation rate finally pick up?
“I do not see unemployment going much lower than current levels. It is likely that the strong labor market will eventually lead to higher participation rates again.”
As the baby boomers move into retirement, do you anticipate a labor shortage? How will that impact the economy? Will we finally see more improvement in household incomes?
“As the number of retirees per worker increases, it should increase the demand for domestic labor. Retirees tend to spend more on services which cannot be supplied by imports. Absent more open immigration policies, this should put upward pressure on wages, which would indeed help household incomes. But remember, the flip side is that that wage pressure will mean retirees need to pay more for their services. We should all hope that our workforce of the future is up to the challenge of supporting a high ratio of dependents. It will not be easy, especially if we postpone decisions to shore up programs like social security by beginning to gradually increase the retirement age.”
Why is the U.S. economy doing so much better than other economies around the globe? Can our economy sustain growth without greater economic strength overseas?
“Our economic institutions and culture are better equipped to deal with change, in my opinion. Adjusting to the financial crisis required lots of change and we were able to deal with that more effectively. Foreign economies certainly have an impact on us, but we are capable of growth regardless.”
If you could, what would you tell the governor and the state Legislature to do to improve Wisconsin’s economy?
“There is no magic bullet that can change the course of our economy very easily. Former football coach Bill Parcells was fond of saying of his teams: ‘We are what we are.’ And a football team is much easier to change than a state economy, with its given endowment of natural and human resources. I believe that the most important thing public policy can do is help create an environment where desirable firms want to locate and workers want to build a life, recognizing that people have different tastes. Because productive people have different tastes, it is important to be open and tolerant of various points of view.
“My advice to our elected officials would thus be a simple and modest one: To engage in more civil and thoughtful discourse about public policy. Divisiveness in politics signals a high degree of uncertainty about our direction and uncertainty is a big impediment to attracting new firms or workers.
“I’m fortunate to travel the country in my work and people uniformly view the citizens of Wisconsin as an optimistic, friendly and community-oriented lot. Why is there such a big gap between our image of Wisconsin citizens and the image of our politics today? Our success as a state will be defined by our ability to forge partnerships and work together even when we do not agree on everything. This is not just an obligation of our elected officials, but a responsibility we all share.”
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