fedgazette

Despite uncertainty, moderate economic growth expected

Rob Grunewald - Associate Economist
Toby Madden - Regional Economist

Published June 16, 2010  |  July 2010 issue

Despite continued economic uncertainty, including issues regarding government debt levels in Europe and the oil spill in the Gulf of Mexico, indicators show that the Ninth District economy is strengthening at a moderate pace. The Minneapolis forecast models show that this gradual improvement should continue through 2010 and into 2011.

District employment levels are up, and consumer spending has grown moderately. The manufacturing sector has increased output, and home construction has started to pick up. The forecast models predict that these trends will continue into next year. In the agriculture sector, the spring planting and calving season benefited from mild weather. Crop prices are expected to remain level, while some increases are predicted for cattle, hogs and milk.

Moderate employment growth under way

The economic recovery, which likely started by the third quarter of last year (July through September), has been characterized as one observed in data, but not on Main Street. With relatively high unemployment rates, 9.7 percent nationally and 7.4 percent in the district, the thousands of unemployed workers who are looking for jobs probably don’t consider this a recovery as such. However, since employment in the district hit bottom in December of last year, the picture has improved. While district employment as a whole was down 1 percent in April compared with last year, back in December it was down 4 percent.

In April, construction posted the largest decrease in employment from a year ago (–5.1 percent), followed by manufacturing (–3.1 percent) and information and financial activities (–2.5 percent). However, not all sectors decreased; modest growth was tallied in professional and business services (0.1 percent), government (0.5 percent) and education and health services (1.2 percent) (see Chart 1). As hiring continues to pick up, the recovery will likely become more tangible.

U.S. and district employment down from last year

Large Chart

While manufacturing employment was down from a year ago, output turned positive during 2010 in Minnesota and the Dakotas, as shown in survey results released by Creighton University (see Chart 2). The improvement in manufacturing is also evident in the increase in the number of hours worked by manufacturing employees. Since April 2009, hours worked increased in all district states except Montana (see Chart 3). The data suggest that manufacturers are boosting output through longer hours instead of hiring new workers.

Conditions for manufacturing firms improving

Large Chart

Hours worked make a comeback

Large Chart

Not only are staff working more hours per week; they are producing more per hour worked. During the first quarter of 2010, national productivity levels for nonfarm employees increased more than 6 percent compared with a year earlier, the largest gain since 2002. These trends, longer hours combined with productivity gains, are often observed during an economic recovery. That is, companies respond to increases in demand by stretching their current resources while waiting for economic conditions to become stable before making commitments to add staff.

When companies start to add resources, they first turn to temporary employees and contract workers. In a recent Minneapolis Fed survey of temporary staff firms in Minnesota, North Dakota, and Wisconsin, a large majority of respondents noted that client volumes and workers placed with clients increased during 2010 compared with the same period last year (see related story in the fedgazette).

With temporary hires picking up, will the hiring floodgates open? According to the Minneapolis Fed’s forecast models, employment will end 2010 above year earlier levels. However, the pace of hiring will hardly seem like a flood, but certainly more than a trickle. In Minnesota, Wisconsin and the Upper Peninsula of Michigan, growth rates will exceed historical averages (see nonfarm employment chart). In 2011, employment will continue to grow across the district, but employment levels will not reach prerecession peaks until 2013 or beyond, with the exception of North Dakota, which is expected to return to peak levels by 2011. North Dakota’s economy has been supported by an expansion in oil drilling activity and a relatively healthy agriculture sector.

Long-term unemployment levels high

Nationally, the number of long-term unemployed workers and discouraged workers has increased over the past year. The percentage of unemployed who are out of work 27 weeks or more increased from 27 percent in May 2009 to 46 percent in May 2010. The list piled higher as declining employment levels persisted through the relatively long recession. Those who are unemployed for a long period risk losing skills due to their absence from the workplace, making it more difficult to land a job once hiring picks up.

The number of discouraged workers, those who would like a job but are currently not looking for work because they believe no jobs are available for them, increased 36 percent nationally in May compared with a year earlier. Because discouraged workers are not considered part of the labor force, they are not counted as unemployed. However, once they do start looking for a job, they are counted as unemployed and place upward pressure on the unemployment rate. Even as hiring picks up, as discouraged workers enter the workforce, unemployment rates may stay relatively high for a few years.

According to the Minneapolis Fed’s forecasting models, unemployment rates in the district are expected to edge lower but remain above historical averages for awhile, with the exception, again, of North Dakota, which is expected to return to its historical average by next year.

Consumer spending growing

Growth in consumer spending during 2010 has helped keep the economy moving forward. Auto sales that were anemic a year ago are finding a spark once again in 2010. New car registrations increased more than 80 percent in Montana and North Dakota in April from a year earlier, while registrations were up about 15 percent to 20 percent in northwestern Wisconsin and the Upper Peninsula.

Sales nationally at major retailers were softer during April and May compared with stronger growth earlier in the year, but still positive. The International Council of Shopping Centers reported that revenue growth at stores open at least a year slowed in April (0.8 percent) and May (2.6 percent).

Meanwhile, district tourism businesses have expressed cautious optimism for the summer travel season. For example, the number of nonresident visitors to Montana is expected to increase 2 percent compared with a year ago after a flat year in 2009, according to state tourism officials.

Consumers continue to face tame price increases. The April consumer price index was only 2.2 percent higher than a year earlier. Once prices for food and energy, which tend to be relatively volatile, are removed, the core index increased 0.9 percent, the smallest year-over-year increase since January 1966.

Future consumer spending will benefit from gains in personal income. After decreasing in 2009, district personal income is expected to grow in 2010 and into 2011. According to a survey of professional services firms (see professional services survey), 35 percent of respondents expect higher consumer spending over the next 12 months, while 27 percent predict declines.

Residential real estate and construction pick up

Residential real estate has picked up. Existing home sales in district states increased 10 percent during the first quarter compared with a year ago. Sales continued to grow into April, the last month to take advantage of the home buyer tax credit. Home prices have been soft, with many sales considered distressed (see related story in the fedgazette). However, first quarter prices were moderately higher in some district cities, with the exception of Minneapolis-St. Paul, where prices were 7 percent lower than a year ago.

Meanwhile, district housing units authorized for the first four months of 2009 were 43 percent higher than the same period last year. Most of the gains were for authorizations of multifamily units; single-family home permits were flat. While results from the forecast models are mixed, the increase in authorizations suggests that home building is no longer scraping bottom.

2010 looking up for animal producers

After several good years, 2009 was mediocre for agriculture as a wet fall caused the harvest to spill into 2010, and dairy and livestock producers battled low prices and high input costs. The first half of 2010 brought new life to agriculture; mild weather allowed early planting and a good calving season. Meanwhile, 2010 prices for the major district crops softened, but prices for livestock and dairy rebounded (see table below).

Every quarter, the Minneapolis Fed surveys agricultural lenders to get views on how their customers are performing financially. Results from surveys last year showed increased concern about profits. This trend continued in the first quarter (April 2010) agricultural credit conditions survey (see Agricultural Credit Conditions, First Quarter 2010), with half of the respondents seeing decreased agricultural income. Lenders were less pessimistic about farm profits in the second quarter of 2010, with 42 percent expecting lower income and 14 percent expecting higher income.

Ranchers and farmers enjoyed a mild spring in 2010. Many ranchers across the district reported a good calving season. The warm spring allowed a smooth completion of the delayed 2009 harvest and early planting across most of the district. Many district crops have emerged from the ground earlier than last year and earlier than the five-year average. Crops are also in good condition. This increases the odds of a bountiful harvest. In addition, decent soil moisture levels are evident across most of the crop-growing regions of the district. However, drought conditions intensified in southeastern Minnesota and western Wisconsin.

After crop prices dropped last year, the U.S. Department of Agriculture expects corn, soybean and wheat prices to be relatively stable through 2011. This stability, combined with a potentially large harvest, could mean higher farm revenues. Meanwhile, cattle prices have jumped from 2009 levels and are expected to rise even further in 2011. Hog prices also rose in 2010 and are expected to remain at those levels into 2011. Milk prices increased from 2009, but are still below 2008 levels. Expected 2011 milk prices show an uptick from 2010. The increase in output prices and softening of input prices should bode well for livestock and dairy producers.

Cattle and hog prices rise
AVERAGE FARM PRICES
  2007/
2008
2008/
2009
Estimated 2009/2010 Projected 2010/2011
(Current $ per bushel)
Corn
4.20
4.06
3.45–3.65
3.30–3.90
Soybean
10.10
9.97
9.50
8.00–9.50
Wheat
6.48
6.78
4.85
4.00–4.80
 
2008

2009
Estimated 2010
Projected
2011
(Current $ per cwt)
All Milk
18.29
12.84
15.75–16.15
15.80–16.80
Choice Steers
92.27
83.25
92.00–96.00
95.00–102.00
Barrows & Gilts
47.84
41.24
54.00–57.00
53.00–57.00

Source:
U.S. Department of Agriculture, estimates as of June 2010



More on the District Forecast

District Forecast—Nonfarm Employment

District Forecast—Unemployment Rate

District Forecast—Personal Income

District Forecast—Housing Unit Authorizations

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