The U.S. economy has been in a lengthy expansion period since the Great Recession ended. But while the economy has grown for seven years, many have been frustrated by the persistent slow pace of that growth.
Like it or not, the slow and steady growth pace for the U.S. economy is expected to continue for the rest of this year and into 2017, according to Dr. Abdur Chowdhury, professor of economics at Marquette University. One of the problems, he says, is that the economy is not producing enough high-paying jobs.
Chowdhury was interviewed by BizTimes editor Andrew Weiland for the BizTimes Mid-Year Economic Forecast. The following are excerpts from that interview.
BizTimes: How would you assess the state of the U.S. economy?
Chowdhury: “We are having a sort of slow but steady growth. In the first quarter of this year, the growth rate of GDP was very low, about 1.1 percent. What we are expecting is that will pick up in the second and third quarter. My guess is in the second quarter you will see growth (reported) somewhere between 2 and 2.5 percent. The same as we are expecting in the third quarter.
“One thing that has been happening in the labor market – we have been creating a lot of jobs. If you set aside the month of May, in the last 12 months, job creation, on average, was in excess of 200,000 (per month). The problem I see is the types of jobs we are creating. We are creating a lot of jobs, but most of those jobs are in low-skill, low-pay areas. We are not creating enough jobs in high-skill, high-paying areas. As a result, wages are not growing. If you look at the wage growth in the U.S. in the last couple of years, it has been relatively flat. Recently, we have seen some wage growth and hopefully, as the labor market continues to tighten – unemployment is at 4.7 percent – we are hoping that wages will start picking up.”
BizTimes: Why is it that the U.S. economy has not been growing at a faster pace?
Chowdhury: “That’s really a puzzle for everyone. Since the recession, if you look at overall economic growth it has been in that 2 percent range, plus or minus a little bit. It has not picked up. One of the reasons is we have seen a drop in productivity in the U.S. Another reason is there is a global slowdown going on. Our exports have dropped significantly. The strong dollar, that has also affected our economy a little bit. A number of factors have sort of combined to cause this drop in growth rate. This may turn out to be the new normal, having this 2 percent, 2.5 percent growth rate on average.”
BizTimes: What’s keeping wage growth down? Why aren’t we creating more high-wage, high-skill jobs?
Chowdhury: “We have created a lot of jobs – for example, in the hospitality and leisure sector – but we have not created many jobs in, say, manufacturing. Recently, we have started creating some jobs in construction. Those are high-paying jobs. IT services, we have not created many jobs. Those are the areas that I think are lacking. The U.S. is a service economy right now. We are creating a lot of jobs in that service area, but not in manufacturing, construction, IT.”
BizTimes: And what’s the reason for that? Are we still losing the fight for many of those jobs to overseas competitors?
Chowdhury: “With manufacturing, yes. We are losing jobs to low-paying foreign competition. Currently, we have about 12 million manufacturing jobs in the U.S. The peak was about 19 million jobs. We have been going down over the last 10 years in terms of manufacturing jobs. If you look at construction, the housing market still has a lot of problems. New homes are not being built at the rate they used to be.”
BizTimes: Let’s talk more about the housing market. You said there are still problems. It seems improved, but what concerns do you still have?
Chowdhury: “One thing we have noticed is builders’ sentiment. That’s an indicator we look at. If it improves, that tells you builders will be building new homes and the housing market will pick up. The mortgage rate has been very low. Despite the low mortgage rate, we don’t see builders’ sentiment improving. If you look at first time homebuyers, we don’t see (a typical amount) of activity among the first-time homebuyers. Whereas you look at the rental market, we see a lot of activity over there. So people are, for whatever reason, not moving toward buying homes as much as we’d like to see.”
BizTimes: What about the oil and gas sector? Oil prices came way down from their high. A lot of companies in the region say their results are down because of weakness in the oil and gas sector.
Chowdhury: “This is having a significant impact. If you look at, for example, employment in … mining and energy, you see a huge drop in employment. I think now they have negative growth in that sector. Because of the drop in oil price, business investment in that sector has significantly dropped. That was one of the reasons our first quarter growth rate was so low. We saw a sharp drop in business investment. The drop in oil price is having a remarkable impact on the U.S. economy. And going forward, I don’t see that changing very much. Oil is now going at around $40 (per barrel). It will stay in the $40 to $50 range for some time to come.”
BizTimes: Why is that?
Chowdhury: “We do see an abundance of supply in the international market right now. The strong dollar is another reason why the oil price is so low. The supply glut we see in the international market will keep oil prices low. If we look at the OPEC countries, they have no intention to curtail production in order to raise price. And with the sanctions against Iran being lifted, Iran is now supplying more oil into the international market. You see an increase in supply, but you see a drop in demand, because the European economy is not doing very well, China is slowing down. All of that has reduced the demand for oil while the supply has gone up. This excess of supply will keep the price of oil low for some time to come.”
BizTimes: Let’s talk about interest rates. The Fed finally did a small rate increase in December, but has not done another since then. Will it raise rates anytime soon?
Chowdhury: “There was some talk in March, April that (the Fed) might raise the rates in June. That didn’t happen. The next meeting is scheduled for the end of this month. I’m positive they are not going to raise interest rates then. Then comes the next meeting in mid-September, which is close to the election period. So, I don’t think they would raise rates so close to the election. I don’t see any rate increase before at least December.”
BizTimes: Is that a sign that the Fed lacks confidence in the economy?
Chowdhury: “Yes. They want to wait a little bit longer to see if there has been any structural change in the labor market. I think there is some nervousness within the Fed. They don’t want to raise rates and push the economy into a slowdown or a recession. I think they will wait a little bit more before they raise rates.”
BizTimes: What is your take on the Wisconsin economy, particularly in the Milwaukee area?
Chowdhury: “There are some good things happening in the Milwaukee area, and some not-so-good things. The unemployment rate in Wisconsin is very low, 4.2 percent. But we see the same trend here as we see nationally; we are creating a lot of jobs but we are not creating high-paying, high-skill jobs. In the Milwaukee area especially, the jobs that are being created are those low-paying, low-skill jobs. As a result, you don’t see much income increase in the local economy.
“One thing that we have failed to do in the Milwaukee area in particular and in the state in general is, I don’t think we have been able to attract new businesses the way we thought we would be able to. Remember the Walker administration, in his first term, they were talking about attracting businesses from other states…it hasn’t happened. One of the reasons for that I think is the lack of proper infrastructure in the state. And here I compare Wisconsin with Iowa. If you look at Iowa, they have been able to develop their infrastructure very well, especially the IT infrastructure. As a result, they were able to attract a lot of new businesses. We have not been able to do that in Wisconsin. The other thing I see is a lack of diversification in the Wisconsin economy. If you look at our major industries – for example, paper products – nationally and globally…we don’t see an increase in the demand. It is maybe flat or going downwards. The way out of that would be trying to diversify.”
BizTimes: Looking ahead, nationally, how much longer will this slow but steady expansion period continue? Is there a recession looming?
Chowdhury: “I don’t see any recession, at least in the next 12 months, unless something unusual happens. But it will (continue to) be slow growth. The growth rate will be at most 2 to 2.5 percent. It won’t exceed that in the coming months.”