Is the Stronger U.S. Economy Here to Stay?
25 Feb, 2015
Interview by Rachel Duran
The east south central United States will benefit, but how long will it last?
Editor’s Note: This interview was conducted January 9, 2015. For the latest information in regard to the U.S. economic forecast, visit www.conference-board.org.
The U.S. economy is entering what is projected to be a couple of years of robust growth. Gasoline prices are falling, as is the nation’s unemployment rate. Monthly job creation continues to average 240,000; however, will it mean increases in wages? With stable inflation rates businesses are not exactly in a position to raise prices to generate more revenue in order to pay higher wages and heath care benefits.
Ken Goldstein, an economist for The Conference Board, says the burst in growth bodes well for the nation, and will turbo charge some of the industries in the East South Central region — at least for a time.
Rachel Duran: Before we discuss the overall U.S. economy, with a focus on the East South Central region, let’s discuss what is happening with oil prices — how low will they go?
Ken Goldstein: Oil prices are the big unknown. Prices per barrel might go lower; can it drop to $40? It’s possible. At some point, relatively soon, oil prices will finally hit bottom. The questions are: how much of a bounce back will we see?; and when will we see it? I would almost put it out of the question that we will go back to $75 or $80 per barrel. Maybe by Thanksgiving we will be back up to $60 a barrel — I don’t think it will happen sooner.
Before all of this happened there was a disconnect between the price of oil and other prices of energy, especially electricity. Gas is much cheaper but what we are paying for electricity isn’t much cheaper because we are generating electricity from natural gas and coal and other things as opposed to crude oil.
In regard to the energy story, we need to look at it not so much as how low prices will go but how long they will stay low. We will see prices begin to recover in the course of the year.
Longer term is the question of what happens in the renewable energy sector. While the low price of oil would seem to make the price of renewables seem less economically desirable, the very fact that fossil fuel prices can change this much actually leads folks to further explore renewables.
The combination of what is happening with jobs, what is about to happen in wages, and what has been happening with the price in gasoline, is going to lead to a strong consumer market. It will deliver the kind of economy that the leading indexes have been telling us was just around the corner. – Ken Goldstein
Renewables have two advantages over fossil fuels. They are cleaner, and they don’t have big price swings because they are renewable.
Duran: The U.S. economy is showing consistent signs of growth. The Conference Board recently released a report that found CEOs are optimistic about the economy. What else does the organization’s data tell us?
Goldstein: There are three things to point out that are important signals of where we are headed in 2015. We are in a position where the U.S. economy is demonstrating we are a dynamic economy. We can handle what would take down other parts of the world. And we shouldn’t lose sight of that.
The Conference Board’s Leading Economic Index has been telling us throughout much of the second half of 2014 that the U.S. economy is fundamentally gathering steam. The index is an indicator of where we will be over the next few months. The latest reading, from the end of November, essentially told us the economy is heading for a robust expansion.
The recession ended in 2009, and for a very long time, while the statistics told us we were no longer in a recession, when you looked at consumer confidence, they still acted like it was a recession out there.
The leading economic indicators tell us consumers feel like the recession is long over. Today, we issued the latest jobs report, where we gained 250,000 new jobs in December. The monthly average gain has been about 240,000 new jobs or so. And with a 5.6 percent unemployment rate, this is a really important marker.
A critical point is while U.S. consumers are happy the job market is as strong as it is, they are waiting for wages to rise. We are not there — yet — but we are close. We could see it this winter. Certainly we will see it this spring.
The combination of what is happening with jobs, what is about to happen in wages, and what has been happening with the price in gasoline, is going to lead to a strong consumer market. It will deliver the kind of economy that the leading indexes have been telling us was just around the corner.
Duran: What are the challenges to this scenario?
Goldstein: Businesses are looking at a higher labor bill. This is because there are more people to pay, wages are rising, and health care premiums are still going up. This is happening against the back drop of a low and relatively stable inflation rate.
When inflation is stable, businesses are not in a position to raise prices to generate more revenue to pay that higher wage and heath care bill.
The point of the exercise is that 2015 will be a better year than 2014; and 2015 might be a better year than 2016. So we are in for a burst of growth. We will level off. The question is, how much? It will be higher than a 2 percent economy but less than the 2.5 plus percent economy that we are about to enter.
So, on the one hand there is the potential for more growth in the East South Central region than the nation, but the profit squeeze may be tighter in this part of the country. It may mean while there is a disproportionate improvement in economic conditions, it may not last as long. – Ken Goldstein
Duran: Let’s drill down to a regional level. How is the East South Central region of the country [Alabama, Kentucky, Mississippi and Tennessee] performing?
Goldstein: The East South Central United States generally has a higher unemployment rate than the national average.
You can look at this one of two ways. One is this change over in the economy. The closing of the output gap, the closing between the actual growth rate and the potential growth rate, will slow enough so that it will help across the board. But it will help more in some places than in others.
For example, in the northeast region, from Washington, D.C., up to Boston, things might not feel that different six months or nine months down the road. But I suspect in the East South Central region they will feel a fundamental difference. This will be in terms of the changes in the labor market, and the real estate market in regard to home building, home values and apartment rentals.
When focusing on the east south central region, if I am right, we will see more changes in places like Birmingham, Ala., than in Allentown, Pa.
Duran: Why is this the case?
Goldstein: Part of it is the east south central region, going back to the hurricanes that affected New Orleans and the Gulf Coast, the BP oil spill, and even later, the tornadoes, this region has been hit again and again with disasters.
Secondly, the industry in this region has the lowest productivity growth rate of all the country’s nine regions. There a lot of industries in this region with a small profit margin. So, if the economy indeed will start to improve nationwide, and if the impact will be disproportionately better in the East South Central region, more jobs will open up. Wages will rise, though not necessarily to the rates people get paid in other parts of the country.
But this also means that there will be a profit squeeze on small businesses, which are the predominate creators of net new hiring. The squeeze is because labor costs are rising but prices on products aren’t rising.
So, on the one hand there is the potential for more growth in the East South Central region than the nation, but the profit squeeze may be tighter in this part of the country. It may mean while there is a disproportionate improvement in economic conditions, it may not last as long.
Duran: Are there areas that are performing better than others in the east south central region at this point?
Goldstein: Some of the travel, leisure and hospitality sectors that were hard hit by the disasters, especially along the gulf coast, might recover at the same time there is this improvement in the overall economy. The recovery will turbo charge some of those industries — at least for a time.
Also, some of the new startups, not just the high-tech auto assembly, but other sectors in the region might really take off in this type of economic environment.
With the older types of manufacturing, which has struggled in this part of the country, you might see some companies close their doors.
Duran: What other economic challenges should we watch for?
Goldstein: On a side note—and this will be a big story nationwide — there is too much physical retail square feet of space given that so much of our shopping is online as opposed to visiting the brick and mortar stores. That may be more true with this region than as the country as a whole. You have the anomaly of consumer spending picking up at the same time more stores will be empty, and as chains, particularly regional chains, go out of business.
If consumers are spending more money how can it be that these retail outlets will go out of business? Part of it is that squeeze. Those retail outlets and businesses that have done a better job integrating what they are doing with brick and mortar as well as with their websites, will thrive.
For those who have missed that opportunity, some of them will close, and some will reduce the number of outlets.
Ken Goldstein is an economist with The Conference Board, and can be reached by emailing firstname.lastname@example.org. The Conference Board is a global, independent business membership and research association working in the public interest. Learn more by visiting www.conference-board.org.