R or no R?

DKW; May 1, 2008

Public sector economists are reluctant to use the R word. So we talk about economic slowdowns, downturns, or growth challenges. As of today, May 1, 2008, there is no consensus as to whether the U.S. economy is in or will enter a period of less than positive growth. Seventy percent of National Association of Business Economists (NABE) economists believe the economy will not shrink in the first half of this year. Fifty-one percent think economic growth would be very slow, between zero and one percent during the first half of this year. On the other hand, some notable economists say we are in a difficult time and others go as far as to say we may be headed for an economic situation the likes of which haven't been seen in eighty-eight years.

Preliminary statistics released April 30, 2008, registered first quarter 2008 GDP growth at 0.6%. The Fed lowered interest rates 25 basis points, to 2.0%. They lowered the discount rate as well, to 2.25%. Historically the spread is about 100 basis points, although the Fed narrowed it beginning last summer. (Interestingly, 69 percent of NABE economists said Fed action had no impact on their businesses.)

Total Wisconsin non-farm jobs in March 2008 were recorded at 2,825,100. This is down 4,900 jobs from year-ago levels. For March 2008, Wisconsin's unemployment rates, seasonally adjusted and unadjusted, show a steady economic picture, 4.8% and 5.6%, respectively, compared to 5.0% and 5.6% a year ago. Jobs data in the early months of the year can be a bit fickle due to weather affecting construction and retail and how school spring vacations align with job survey reporting dates. The coming months' data will give us better portrayal of the state's economy.

The sectoral breakdown of the economy is varied. The single-family residential housing sector continues to search for a bottom, plagued by high inventories and uncertain prices. National sales of existing homes fell in March, after registering a slight increase in February. The northeast regions had price and sales increases. The west had significant price decreases but sales increases. Midwest and south homes sales and prices decreased. While foreclosures are up in the state, Wisconsin's housing sector is not as exposed to the mortgage/price dilemma as much as other states such as Arizona, California, Florida, Nevada, and Ohio.

Automotive sales are also down. General Motors cut its forecast for total industry U.S. car sales in 2008 to the mid-15 million units range, down from an earlier estimate of about 16 million units. If only 15 million cars and light trucks are sold in 2008, it will be slowest sales year since 1995. GM has already announced layoffs at their Janesville plant, which makes SUVs, for June, going to one shift.

Other sectors are doing rather well. Sectors supporting Wisconsin's economy are found in manufacturing and agriculture. The weak dollar is benefitting exports of manufacturing machinery, equipment, and agricultural commodities. Milk and grain prices are at or near record highs, although high feed prices are cutting into dairy profits. Corn planting intentions for 2008 are projected to decline, with gains in soybeans and wheat.

We still see gains in the service providing sector, particularly in the health care sector, up 9,600 jobs since a year ago. Business and professional services also show a year-over-year gain of 1,800 jobs.

Payroll tax revenues are increasing more than sales taxes. The Wisconsin Department of Revenue reports year-to-date payroll withholding up 5%. State sales tax revenue up 1.2% over a year ago on a 12-month moving average. March 2008 sales tax collections were up 1.9% over year-ago.

In the transportation sector: Wisconsin air enplanements were up 3.9% in 2007, enplaned cargo weight was down 1.5% in 2007, state inbound and outbound rail tonnage was steady, even with the drop in CN service, and February 2008 Hiawatha Amtrak ridership set a new record. It seems high gasoline prices are putting more people into mass transit modes of transport.

Economic growth will be slow overall in the coming months. Where and in what sectors will vary.

Written by Dennis Winters, Chief Economist and OEA Administrator. May, 2008.

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