fedgazette

An economic expansion with jobs expected in 2004

2004 Ninth District Economic Forecast

Rob Grunewald - Regional Economic Analyst
Toby Madden - Regional Economist

Published January 1, 2004  |  January 2004 issue

The Minneapolis Fed's business conditions outlook poll and regional forecasting models point toward moderate economic growth in 2004. The poll and forecast results also suggest that growth will be accompanied by increases in jobs in 2004 after two years of a jobless expansion. The manufacturing sector, hit hard by the recession in 2001, is showing signs of improvement. Meanwhile, the agriculture sector was buoyed by a generally solid harvest and higher commodity prices in 2003; continued strong prices are expected for 2004.

Finally, job growth

The national and district economies have grown over the past two years since the recession officially ended in November 2001. However, despite increases in economic activity, more than 1 million net jobs were lost nationally and almost 20,000 jobs were lost in the district from October 2001 to October 2003.

Chart: District Nonfarm Employment

As the economy expanded following the 2001 recession, businesses have been able to increase output without hiring additional employees, due to gains in labor productivity, that is, the amount produced per hour worked. During the first nine months of 2003, productivity grew 3.2 percent compared with the first nine months of 2002, allowing output to expand with the same amount of labor. Combined with moderate wage and salary increases, productivity gains have also helped reduce costs and boost profits for many companies.

At some point, companies will likely maximize the amount of output that can be gained from productivity enhancements and will need to hire employees to keep pace with rising demand. Indications of that demand are solid personal consumption spending and recent relatively strong increases in business spending on equipment and software.

Recent data suggest that the pace of layoffs has slowed and the labor market is stabilizing. In Minnesota, initial claims for unemployment benefits for the three-month period ending in November were down about 10 percent from two years ago and are slightly above last year's levels. District employment levels were about the same in October as they were a year ago with a mix of increases and decreases by industry. Employment increased the most in education and health services at 2.5 percent, followed by leisure and hospitality at 1.7 percent. On the downside, manufacturing shed 3 percent of its workforce.

State and local governments dealt with tight budgets in part by cutting spending. Across district states, over 13,000 state and local government jobs were lost between October 2002 and October 2003; overall the government sector decreased employment by 1.5 percent. Business leaders noted tight state and local government budgets as a concern in the Minneapolis Fed's business conditions poll.

Looking forward to 2004, respondents to the outlook poll foresee increased hiring in their communities and at their own companies. The Minneapolis Fed's forecasting model was more cautious than the poll but still pointed to positive district job growth in 2004 with an increase of almost 1 percent.

Signs of improvement in manufacturing

The manufacturing sector took the brunt of the economic slowdown. While the manufacturing sector created over 140,000 net jobs in district states during 1990s, from October 2000 to October 2003 just as many jobs were eliminated. According to a survey by Creighton University, manufacturing activity began showing decreases in Minnesota in November 2000. During the downturn, Minnesota companies making computer and electronic products, machinery and fabricated metal products saw some of the largest job reductions.

However, recent data from unemployment insurance claims show that manufacturers are cutting fewer jobs than they were a year ago. Furthermore, the Creighton University survey showed recent increased activity in Minnesota, while manufacturing continued to expand in the Dakotas, which had only a few months of contraction since November 2000. Outlook poll respondents from the manufacturing sector predicted growth rather than decreases in investment and employment in 2004. A boost in the manufacturing sector would help support the overall economic expansion.

Moderate wage and price increases

Wage increases were relatively modest in 2003 and are expected to grow modestly in 2004. Nationally, wages and salaries for civilian workers increased 2.8 percent during the first nine months of 2003 compared with the first nine months of 2002. Growth in wages and salaries has decreased steadily since 2000, when it posted a 4 percent increase. According to respondents of the business outlook poll, this trend will continue in 2004; 96 percent expect wages to increase 3 percent or lower next year.

However, the slow increase in wages and salaries masks a much faster increase in employee benefit costs. Nationally, benefit costs increased 6.3 percent during the first nine months of 2003 compared with the same time period in 2002, up from a 4.9 percent increase in 2002. Health insurance costs increased in the double-digits during 2003, contributed to the upward pressure on benefit costs (see related story).

The total cost of compensation—combining wages, salaries and benefits—increased 3.9 percent during the first nine months of 2003 compared with a year ago and was modest relative to the past few years. The 2003 increase was about the same pace of growth in 2002 and somewhat slower than in 2001 and 2000.

Overall, price increases remained modest in 2003, and the outlook poll suggests about the same pace for 2004. During the first 10 months of 2003, the consumer price index increased 2.4 percent compared with the first 10 months of 2002. Exceptions during the past year included significant price increases in some home building materials, natural gas, beef and college tuition.

Home building strong, commercial construction stable

Home building continued to pull its weight during the past year, as district housing units authorized for the first 10 months of 2003 increased 6 percent from the same time period in 2002. Residential real estate activity was also brisk; third-quarter sales of existing homes were 10 percent higher than a year ago in district states.

Commercial real estate activity is still finding its legs after a slow couple of years. Contracts for large building projects, including buildings, roads and bridges, and sewer systems, were down 3 percent for the first 10 months of 2003 compared with last year, according to the Construction Bulletin. Office construction was reported slow in Minneapolis-St. Paul, while retail construction activity was strong in several areas of the district.

Will higher prices offset effects of drought in 2004?

Drought spread east across the Ninth District during the late summer and fall. However, most district farmers managed to capture a large harvest, especially for early-maturing crops. Coupled with higher commodity prices, the harvest meant increased farmer and rancher financial performance in 2003. The outlook for 2004 is mixed, as prices are expected to remain relatively strong, but continuing drought has farmers and ranchers worried about conditions in 2004.

Ninth District farmers, buoyed by North Dakota production, enjoyed an increase in total production of corn, sugar, small grains and peas in 2003 from 2002. For example, North Dakota farmers produced 108 percent more barley, 66 percent more oats and 46 percent more wheat in 2003 compared with 2002. In contrast, district soybean production decreased from 2002. Average prices increased in 2003, as wheat prices jumped 28 percent, soybean prices increased 26 percent and corn prices rose 18 percent.

Meanwhile, dairy and cattle producers received higher prices for their products but also paid more for inputs. Average 2003 hog and milk prices rose 13 percent and 4 percent, respectively, from 2002. Primarily due to the closing of the Canadian border to live beef cattle sales, the average price of choice steers increased 27 percent. The financial picture is muddied somewhat because feed prices, a major input to animal production, have also risen significantly. However, a Minneapolis Fed Agricultural Advisory Council member reported generally strong cattle producer profits. In addition, cattle on feed at South Dakota feedlots increased 4 percent in November 2003 over November 2002.

The outlook for agricultural income is mixed as higher feed costs and continuing drought might offset forecast strong prices. Livestock and soybean prices are expected to increase, corn and milk prices are predicted to remain flat and wheat prices are likely to decrease in 2004. "The escalating prices in soybeans and corn will have a very negative impact on animal agriculture in 2004," wrote a Minnesota agricultural producer in the business outlook poll.

AVERAGE FARM PRICES
  2000/
2001
2001/
2002
Estimated 2002/2003 Estimated 2003/2004
(Current $ per bushel)
Corn
1.85
1.97
2.32
2.00-2.40
Soybean
4.54
4.38
5.53
6.85-7.65
Wheat
2.62
2.78
3.56
3.20-3.40

  2001 2002 Estimated 2003 Estimated 2004
(Current $ per cwt)
All Milk
14.97
12.11
12.55-12.65
11.85-12.65
Choice Steers
72.71
67.04
85.47
84.00-91.00
Barrows & Gilts
45.81
34.92
39.61
39.00-42.00

Source: U.S. Department of Agriculture, estimates as of December 2003.


Top

 
Latest

Narayana Kocherlakota