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Iowa’s Economic Trends

posted on March 5, 2010

Searching for a silver lining.  Economists scouring traditional business indicators for glimmers of hope that the nation and Iowa are pulling out of recession.  We’re questioning two prominent economists, Creighton University's Ernie Goss and the University of Iowa’s Charles Whiteman, on this edition of Iowa Press.

Borg: To many businesses these days, it isn't a matter of making a profit. It’s more like how to survive. Access to capital and cash flow are common terms in the struggle, especially for small business. And as businesses struggle, so goes the job market, so does government. Puny profits and vanishing paychecks aren't producing tax revenues, the life flood for government services. And that's why Governor Chet Culver and legislators are eagerly awaiting next Thursday’s report fromIowa’s Revenue Estimating Conference. That quarterly report analyzing economic trends and predicting tax revenue for those crafting the state's new budget for the year beginning July 1. Dr. Ernie Goss ofOmaha’sCreightonUniversity tracks economic trends, particularly in theMidwest. Dr. Charles Whiteman heads theUniversity ofIowa’s Economic Research Institute. And earlier today, as a member of the state's council on economic advisors, he provided information to Governor Chet Culver. Gentlemen, welcome to Iowa Press. We’re eager to hear what you have to say.

Thank you very much.

Borg: Across the Iowa Press table, Associated Press Senior Political Writer Mike Glover and Radio Iowa News Director Kay Henderson.

Glover: Mr. Whiteman, let's start with you. And as a preface to both of you, if I could warn you we're really most interested in your view of the economy inIowa. This is anIowa show and we're focused onIowa’s economy. Mr. Whiteman, tell me where you thinkIowa’s economy is in the continuum of things. The conventional wisdom seems to be we've bottomed and started a slow, painful recovery. Is that your take? Where are we?

Whiteman: Yes, we are. We’re turning. And I would say that particularly with respect to income, the trough was about the third quarter of last calendar year. We turned up inIowa in personal income in terms of growth in the fourth quarter. But employment still hasn't turned up, so we're waiting for that. Our forecast suggests that it's going to happen about mid year. So we're still losing jobs. Not as rapidly as before. We think that will turn around in a few months.

Glover: Mr. Goss, same question to you, where do you seeIowa’s economy in this continuum?

Goss: I’ve got to agree with Charles' assessment. We did two surveys of banks in rural areas, and then we do a survey of purchasing managers, supply managers in more urban areas. Both -- the rural areas are weaker right now, so there is a significant difference between what's going on in the rural areas and what's going in the urban areas. Both are recovering. Our leading economic indicators are pointing higher. But as Charles says, you're still seeing some problems with jobs. And if we're talking about state tax collection, that's even more of a lagging economic indicator. So we've got to see job growth, unemployment coming down, and tax --

Glover: Let's go there because that's the million dollar question that you have to give the governor some advice on. At what point do the state's coffers begin to feel this recovery? Is it now? Is it down the road?

Whiteman: Well, three months ago I was going to say now, which we did have a good revenue month in December of last year. Unfortunately, January and February not so good. The new income information that we got since the December forecast was made also not so good. So my forecast is revised downward for revenue growth for this fiscal year. I’m still about two percentage points more optimistic than the official Revenue Estimating Conference estimate that prevails currently. But I’m seeing the likelihood of a decline for this year. A rebound next year.

Glover: So next year is going to be pretty good?

Whiteman: Yes.

Glover: Okay. Mr. Goss, same question to you. When do states start to feel in this?

Goss: Feel the upturn?

Glover: Right.

Goss: They're certainly feeling the downturn now. That’s no news. Don’t need an economist for that. Don’t need a weatherman to tell you which way the wind blows. That’s true. And I think we're looking at 2010 still rough on terms of state tax collection. Of course, that's income and sales tax primarily what we're talking about. The outlook there is not good because I expectIowa, for example, according to our surveys and certainly in the urban areas, to add jobs for the first -- perhaps for the first quarter. Very few jobs, though. So that's not going to bump up tax collections to any great degree. So when we're looking at sales and income tax collections, they're still going to be flat and down for the first half. Up for the second half but not enough to make up for the downturn in the first half. So 2010 is going to be a challenging year for state tax collection.

Glover: Do you see it coming back for 2011 for the next budget --

Goss: Yes. We’re going to see -- what's going to be important, in my judgment, is a weaker dollar, which we haven't seen. We’ve seen a stronger dollar. Usually we need -- a weaker dollar makes agriculture -- pushes up agricultural commodity prices. That’s going to be very important. Recently we've seen the opposite. The dollar is gaining in value, and I think that's an artificial gain. We’ll see the dollar trim downward in the -- certainly in 2010, in my judgment, which pushes up ag commodity prices and farm income, which is a big factor inNebraska and inIowa as well.

Henderson: Gentlemen, let's help the viewer who is not an economist. There’s this phrase that gets thrown around, the jobless recovery. To a person who doesn't have a job, it doesn't seem like much of a recovery. Define that for people and how this has come to be known as a jobless recovery.

Whiteman: Well, to start, at the end of a recession and at the end of the last several recessions, as firms start to see demand for their products -- demand for their services and so on, they start to add, maybe shift lengths or overtime instead of hiring people back. And that's what we're seeing this time. It’s that incomes are beginning to turn around. Sales is beginning to turn around, but the jobs haven't followed yet. It happened the last time, and I expect that that's something that we're going to be facing in business cycles to come.

Henderson: Mr. Goss, you take a reading on specific business index for theMidwest. Help the viewer who is not quite sure about this jobless recovery.

Goss: Well, as Charles is saying, it is jobless in the sense that we're seeing gains in temporary employment, and that's going to precede growth and permanent employment. What -- in my view, one of the huge factors that's keeping hiring down and not new hiring is uncertainty. We’ve got so much uncertainty out there with what's going on inGreece, with the potential default inGreece,Spain, andPortugalas well. And that's telegraphed back toIowa, to theU.S. And what -- and what we're seeing, of course, is that, plus you've got health care reform, you've got cap and trade, you've got tax increases, all these uncertainties. And if you're a business person, you're saying, well, do I hire now or do I take that risk. And right now they're not taking the risk. They’re not hiring. But this morning the job numbers came out. Lost 36,000 jobs across theU.S., not that bad. And the unemployment remained the same as 9.7 percent. TheIowa numbers will come out later. I think it will be somewhat the same. Minimum job losses forIowa. I think when we all -- when we count it all in the first half the 2010,Iowa will add jobs for the first half.

Henderson: Mr. --

Borg: Go ahead.

Henderson: Mr. Whiteman, let's talk about recession versus depression. Some of that jobs data in this report indicates that there are a number of people who have quit looking for a job. There are a number of people who are working in a job that's paying them far less than they made before. If you add those numbers together, the unemployment or underemployment number is approaching 17 percent. I mean at what point does this recession turned into a depression?

Whiteman: I don't think it's going to.

Whiteman: So at no point. A depression is a pretty big deal. In the Great Depression, the unemployment rate in the United Statesapproached 25 percent.

Henderson: Right. But 17 percent seems very, very high.

Whiteman: Well, we have to measure the same thing, all right. So on the basis that I’m measuring 25, that's our current 9.7. So certainly in the Great Depression, the kind of number that you were talking about was much worse as well. So we're not approaching that. And I think the recovery is going to come within the next few months. Nationally I think we're kind of there. We’re getting to the point where it's clear that things are turning out. We went in late inIowa and we're going to come out late.

Borg: Dr. Goss, I want to go back to something Professor Whiteman said just a moment ago. He said we're going to have to get used to this for business cycles to come, and he was talking about a jobless recovery. Is that true? Are we -- is that the way you feel too? Are we going to have to get used to a new norm in unemployment?

Goss: I think we are destined to have higher levels of unemployment than we'd like it see. But I do think if we pursue the right policies, there's no better place on the face of the earth to do business than in theU.S.and inIowa. So if we don't screw it up by bad policies, we're going to have -- we're going to get back to 5, 5.5. That’s going to take several years now. That’s not perhaps -- I may be gone from here but --

Borg: Mr. Whiteman, isIowa, though -- let's skip back toIowa. Is it somewhat unique in that is won't be felt -- the joblessness won't be felt quite as much here because of the kind of economyIowa has?

Whiteman: Well, certainly your unemployment rate is low by national standards. It’s much higher than we would like it to be, but it's not likeMichigan orNevada or, you know, some of the places that were really hard hit. Now, I think that this recession is a new kind of thing forIowa because it started on the coasts. It was financial. It wasn't anIowa kind of thing. It wasn't like the recession that we had in the mid 1980s and nobody else had. So as I said, we went into in late, we went in not as deep. I think we're going to come out late, but I think we're going to come out, you know, mid year.

Glover: Mr. Goss, you know, let's talk about as we recover, are there going to be pockets of recovery, places where things kind of recover faster than other places. Is it going to be a rural versus an urban thing?

Goss: Absolutely. And what we're seeing now is manufacturing is recovering faster than non-manufacturing, and that's showing up in our survey. We’re seeing the urban areas recovering faster than the rural areas. Our bank CEOs are telling us it's still tough out there. And by annualized job losses in the rural areas is still quite significant. There’s not a lot of -- the numbers aren't large but the percentages are large.  So we're -- the rural areas are still taking a hit, and a lot of that has to do with farm income which, of course, 2009 was not a good year relative to 2008. 2010, as long as we see some -- the dollar coming down, it's going to be a good year for agricultural income, which will show up in the rural numbers.

Glover: Mr. Whiteman, as you talk to the governor and other officials, can you give them some advice about where you think things are going to begin to recover first and fastest and places where things are going to be recovering at a much slower rate?

Whiteman: Well, I share professor Goss’s concern about the rural areas. So I think urban, we're going to come sooner and stronger and --

Borg: Why is that? Why is it in the urban areas stronger?

Whiteman: Well, you know, historically, light manufacturing in the state oftentimes, in rural areas, I don't think that's going to come back as strong. Durable goods manufacturing employment in the state is beginning to look more like national durable goods manufacturing employment, which has really taken a hit in this recession. We’re seeing continued job loss in durable goods manufacturing continuing throughout this calendar year.

Glover: Let's look at another regional breakdown. We often hear a lot about the sort of Cedar Rapids/Iowa City corridor and the Ames/Des Moines corridor as being two places where things seem to be better than other places. Are those two economic recovery hot spots?

Whiteman: I guess I would say that they are hot spots, yes. I think that we're going to see strong economic growth beginning pretty much right now in those areas, and then I think the rural areas are going to follow later. We’ve got to build up --

Goss: You said -- you named other areas. What we're seeing in this case is education and health care where we're seeing some job growth as well.

Glover: And those are both centered there.

Goss: Yes, right. So that's a lot of that. And that's where I’ve got -- I think we would all have some concern is a lot of this has been fueled by government. I mean, the G, the C plus I plus G, that's GDP. How much of it is G? When does the C and the I kick in? That’s consumption and investment and that's the real concern. I think it's going to kick in. We are seeing manufacturing doing better, and that's going to be important. But one thing we have to look out for is exports. What’s going on with China? What’s going on withIndonesia, South Korea? Are they buyingIowa products? And if I had some advice to give, it would be to let's get out there, let's encourage exports to those countries that are experiencing much faster growth than what we're seeing in the mature economies of U.S., mature economies of Europe.

Borg: Isn't that mostly the ag economy, though, that exports?

Goss: Absolutely. You’re talking about look at soybean numbers to Chinafor December. Wonderful numbers. So we need to see more of that.

Henderson: Speaking of pockets of the economy, the meatpacking industry is seeing some contraction in the state, particularly in theSioux City andCouncil Bluffs areas. And theCouncil Bluffs area is very unique in that you had the shutdown of a portion of that facility because they wanted to move production closer to population centers. Is there a danger that in these industries which convert raw commodities inIowa to end products that people buy, that that is going to flee the state and go closer to where the population in the country is?

Whiteman: The value chain, I mean you do want to be on the -- when you talk about dirt to dinner, for example, you want to be on the side of the dinner and not on the side of the dirt and closure to that where the value is. And that, of course, is good, but some of this is productivity enhancements. I mean, you talk -- the closure there inSioux City, the announcement was we're closing there but we're not -- we're shifting to -- we're shifting production to anotherIowa facility but not the jobs. Well, that's productivity. So a lot of it -- and that's what we're seeing in manufacturing is a lot of growth in output but not much growth in the jobs. So -- so in terms of your question, I think it's more of an issue of productivity and that's where we're seeing it. And this issue of outsourcing, I’m very optimistic going forward.

Henderson: Mr. Whiteman, we've discussed the manufacturing sector. Is there some sector of the economy where we're going to see a lot of growth in the future?  Manufacturing seems because of productivity changes, upgrading facilities, is there some area of the economy where you see the potential for great growth and personal income growth as well?

Whiteman: Well, I don't think it's particularly insightful, but I will say that services look like they're going to be the future for us, I think.

Henderson: Financial services? Insurance?

Whiteman: You name it. I mean we certainly have a strength in financial services, so that's going to be a base. Also medical care services and so on. I think the days of moving things around and lifting things and having good paying jobs that do those sorts of tasks, those times are behind us.

Glover: Mr. Whiteman, I’d like you to step back and look at the bigger picture. We’ve talked about manufacturing in a number of ways, but there are those who suggest that traditional manufacturing is on sort of an epic downward spiral. Is there something that can be done to reverse that spiral, or should people just accept it?

Whiteman: Well, you're asking an economist a very difficult question, and many economists have gotten in trouble for answering that question. It’s natural as an economic growth proceeds, it makes sense to make things the most efficient way to make them, and oftentimes that means somewhere else. Now, we have seen a lot of job loss as a result of international trade and so on. but I think that a large portion of it is not so much that the job go somewhere else, it's that the jobs get done by machines in Georgia and Texas instead of by people in Iowa and Nebraska.

Glover: Mr. Goss, the same question to you. Someone suggested that the manufacturing sector of the economy is in a permanent downward spiral. What’s your advice to those folks to reverse it, or is there a reversal?

Goss: I think -- I think it is in a downward spiral in terms of jobs, but in terms of output, we're more and more and more every year. I mean it's sort of like the farming sector that said welcome to the club. What happened in farming --

Glover: But machines don't buy houses and machines don't send kids to school, and that's drives the rest of the economy.

Goss: Absolutely, but as professor Whiteman said earlier, we're talking about a shift of jobs in another -- other sectors, and that's what we're seeing in health care expansion, education expansion. We’re seeing other services, value-added services, software production, those sorts of jobs that -- they're expanding. I mean -- so it's a good -- now, it's not -- it's very soft comfort for a person who has lost his or her job to lose it at $15 and all of a sudden you're going down to $8 and $9 an hour in an alternative. But that's what we're seeing some of. But in terms ofIowa’s competitiveness, very competitive going forward with productive work force, so I’m positive. But in that regard, we've got to keep this -- we've got to be open -- an open society. I’m concerned about replicating some of the problems that we did in the 1930s.

Borg: Well, let me -- do you mean protectionism?

Goss: Absolutely I mean protectionism.

Borg: Well, you're seeing a lot of that now, aren't you? Buy locally, is that a protectionism and is that harmful to the economy?

Goss: Not in my view. In other words, I attempt to buy locally --

Borg: What do you mean by protectionism?

Goss: I mean absolutely buy America, which was in the stimulus package that passed in 2009. There was a stipulation of attempting to force organizations to buy -- not buy internationally and that's a very bad signal. What it means -- the real problem is not that if we buy locally, it invites retaliation. I mean, what happened -- look at -- if you get China, Japan, South Korea, Canada retaliating, that really hits and it hits Iowa really hard because we're talking about an economy that depends on exports.

Glover: Mr. Whiteman, let's go to another section of the economy that -- we've talked about manufacturing for a while. Give us your take on the health of the rural economy. Easy question.

Whiteman: Well, as I said earlier, I’m a little concerned. The growth in knowledge industries, unlikely to happen in rural communities. Some of the service industries that we think is going to be strong, not so likely to happen there. Now, I will say there's plenty of role for health care and in rural communities, and that may be a shining spot in terms of rural economic development.

Glover: Mr. Goss, the same question to you. It seems like there's more trouble in rural areas. What’s your prescription for solving the problem? I’ll give you an easy one. Help ruralAmerica.

Goss: The prescription is exports. That’s one of the prescriptions. In other words -- and also if you look at the future for agriculture is very bright in terms of growth in countries that are going to be importingIowa andNebraska andSouth Dakota, products from this part of the country. That’s part of it. A cheaper dollar makes our goods more competitive abroad. That’s very good. And then you're talking about biofuels. And then connected to that, what we need to see, of course, is some of the value added getting there in terms of the agriculturally dependent or linked industries. For example, a Monsanto. For example, John Deere. these companies that are motivated to be in this part of the country, motivated to be in these non-densely populated urban areas, so that's -- there is a bright future there, but I think that's not going to be for the entire farming sector. It’s going to be certain areas, but overall you're going to probably continue to see job losses.

Borg: Kay?

Henderson: Mr. Whiteman, legislators and the governor this past week have been talking about the gambling industry. In general, does the gambling industry help or hurtIowa’s economy?

Whiteman: Wow, you don't hold back, do you?

Henderson: Well, that's part of the legislative debate.

Whiteman: Well, it's certainly in high demand. People want to engage in this activity. The state I think rightly so has said if we're going to do this, we're going to tax it and regulate it. And it certainly has contributed to the state's coffers. Now, the bigger picture as to whether the gambling industry being here and all of the issues that comes with the gambling industry traded off against that additional revenue, I’ll leave that up to other folks to answer.

Henderson: Do you want to answer that?

Goss: I think there's a real problem here that Iowa’s dependence on casino revenues and -- as we all know, the only place you can smoke publicly -- in public areas in Iowa is on the casino floor. Well, in other words, you're talking about increasing competitiveness. Missouri, for example,Illinois. So I see it -- it's certainly great for amusement, but treat it as amusement. And you're sort of betting on it -- I think that's troubling to be on economic development. It’s troubling in terms of tax collections because those things nose dive, and that's my concern.

Glover: Mr. Whiteman, you're going to be advising the governor on these issues as we move forward. As we come through this recession and begin a recovery, what's the most important thing for states to do and what's the most important thing for states not to do?

Whiteman: Well, the most important thing to do I think is to keep our eye on the ball, which is the economic environment for business, for workers, and so on. we want to try to facilitate economic development by not over regulating, not putting barriers in the way of opening new businesses, not putting barriers in the way of creating new jobs and so on. So that's the most important thing to do. I guess by implication the most important thing not to do would be those very things, all those -- barriers to economic development.

Glover: Mr. Goss, the most important thing the state is struggling with this recession should do and the last thing they should do, the thing they should avoid?

Goss: I think, first, I hate to sound like a broken record, but I think off to China. Governor Culver could do a heck of a lot of good by cementing relationships in china to encourage the export ofIowa products intoChina, intoIndonesia, into South Korea, because these are not mature. These are emerging economies. So when they grow by 4 percent, their demand for food grows by more than 4 percent. We call that --

Borg: What you seem to be saying, though, is thatIowa’s agricultural economy is key to the state's recovery.

Goss: I think it is. I know a lot of folks like to think that somehow thatIowa andNebraska andSouth Dakota andNorth Dakota have somehow unhinged or delinked from the agriculture. I don't think it has. And not only is that, I think it's a good thing. There’s great opportunities in ag and related to ag, the value added that we talked about.

Glover: Mr. Whiteman, just a few seconds to go. Do we need a second stimulus package?

Whiteman: I would say no. I think we're going to get through this. I can see the light at the end of the tunnel. I think maybe it's time to start beginning to think about what we're going to do afterwards, which is really the big question right now.

Borg: You see the light at the end of the tunnel. I see the hands on the clock, and we're out of time. Thanks for being with us today. On our next edition of Iowa Press, we're returning to theIowa legislature for an update o6n these concluding weeks of the current legislative session. We'll be talking with Council Bluffs Democrat Mike Gronstal. He leads the senate's majority democrats. The legislators will adjust at that time, receive the revenue estimating conference report, and we'll see how Senator Gronstal views that. And a special note too on the time for Iowa Press next week. Because of our special Iowa Public Television Festival programming, Iowa Press airs only on Friday night next week, and it will be at 6:30, an hour earlier than usual. So make note of the earlier time, and we'll see you then. Thanks for joining us today.


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