Recovery or Not?

DKW; July 14, 2008

Over the last several weeks the tide of economists' thinking on short-term economic growth has risen. Many purporting a current downturn changed their tune a bit as of late and perhaps rightly so. First quarter 2008 real GDP growth was revised up and finalized at 1.0 percent. Not a cause for real celebration, but nonetheless, encouraging and keeping the recession at bay. Most of the major indicators are showing some life: retail sales were positive if muted and based upon gasoline prices; jobs losses were not dramatic on the whole; industrial production was buoyed by exports, even some new orders crept in; and the financial sector appears to be working out its problems with central bank help here and abroad.

Many of those same economists may again be catching the out-going tide. Gasoline prices are now up around $4.00 per gallon, give or take depending on where you live, sucking up most of the U.S. stimulant package rebate checks. Job growth continues to decline. The U.S. lost 91,000 private sector jobs in June 2008, down 600,000 for the year. Wisconsin preliminary June job figures are 17,800 below last year. U.S. weekly initial unemployment claims breached 400,000. Week 28 Wisconsin unemployment claims are running about 12 percent above year-ago levels since week 16. Gasoline, food, and other commodity prices have pushed inflation up over 4 percent (the Feds target is 1 – 2 percent). Retail sales growth is concentrated in discount stores. Economic growth is slowing around the world, dampening demand for U.S. exports. Foreclosures are up. Property values are down. Banks, mortgage companies, and bond insurers are reporting new rounds of write-downs, losses, and capital raising campaigns. Add in the possibility of more war in the Middle East and no wonder consumer sentiment is at depressed levels not seen since 1980 – post oil shock II caused in large part by an Israeli-Iranian conflict.

The participants at our last economic roundtable of June 8, became less optimistic, too. Our consensus for a downturn (R word) in the next 12 months rose to 55 percent, well up from the 40-45 percent level a couple months back. The group doesn't expect economic growth to recover to the trend rate (3% +) until late in 2009 (unchanged). Group expectations for inflation are near 4 percent through 2009. Protracted high inflation alone has large implications for real economic growth, earnings, and the relative value of the dollar.

Still, the state's short-term economic trend is not clear. Exports continue to support the U.S. and Wisconsin economies. Wisconsin exports continue at high levels boosted by agricultural products and machinery. Milk prices remain near record levels at $20.80 per cwt. Corn prices hit new highs near $8.00 per bushel (historically corn prices range around the $2.50 per bushel level). Wisconsin farm cash receipts increased to $771 million in March, above the historic trend of about $550 million. Total year-to-date U.S. payroll employment has fallen by a total of 438,000, a figure that would be accumulated in a month or two of a bona fide recession. Wisconsin continued unemployment claims are up 11 percent on a four-week, moving average basis through week 27, as compared to 50 – 80 percent during the last recession in 2001. According to the Philadelphia Federal Reserve Bank, Wisconsin's economy has been flat over the last three months, whereas most states are contracting. Industrial production has turned positive recently.

Adding to the confusion on the current economic situation for Wisconsin is the fact that the number of jobs and the unemployment rate are decreasing. Wisconsin is one of four states that showed a greater than 0.5 percent year-over-year job loss for May 2008. It is also one of just five states that showed unemployment rate declines.

In attempting to determine the short-term path for the economy, a two-handed economist is necessary and sufficient.

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