Thursday, February 28, 2008

How we might steer clear of a recession, at least locally 

One of the results of presenting last Thursday night was that it provided a hard deadline for me to forecast what happens to the St. Cloud economy in 2008. (My presentation slides are posted, if you're interested.) As I sit here waiting for the budget forecast from the state (the AP reports a Capitol source providing them with a $935 million number -- I'll post about this separately after Tom Stinson and the Dept. of Finance post their presentation) and as I digest the new MN and St. Cloud employment data, it's worth thinking how I use the words 'recession', 'slump' and what we're talking about.

I found this in the AP report very interesting, because it matches my local expectation:
"But this short, mild recession eliminates about one year of economic growth and one year of state revenue growth," the report reads. "The federal stimulus package helps limit the recession's length, but the rebates come too late to prevent U.S. output from declining in the first half of 2008."
One of the areas that Stinson has cited as experiencing real weakness has been production of building products. Wood product manufacturing has lost about 3000 jobs in Minnesota since 2005, and the construction area (broadly defined, including civil engineering) about 14,000, in an economy with about 2.7 million jobs. So at most those sectors might add 0.1 to 0.2% directly to the unemployment rate, not more. Locally, I see a slightly higher impact from these sectors, but not much more.

I noted last Thursday that there's a difference between 'recession' and 'slump', and that most of what people want to call the former (like a two-quarter decline in real GDP) is a better description of the latter. The quote above says nothing about a decline in GDP over a whole year. You might forecast three possible outcomes:
  1. A slump in January through about June, followed by slightly accelerated growth in the second half and a return to normal growth in early 2009. If you were to put that on a graph, you would get a pattern like a 'V' for 2008. Global Insights, the forecasting firm that the Minnesota government uses, has a -0.3% GDP forecast for 2008:I and -0.1% for 2008:II before bouncing back to 2.8% in Q3 and 2.7% in Q4. Those latter two are in the neighborhood of trend growth. Now unless you're going to argue that Minnesota gets hit worse than the nation as a whole -- and that might be Stinson's story, and if so I'm unpersuaded by what I heard last week -- I don't see that as a V. You might get instead...
  2. A pause in the first half and stimulus in the second half giving you something closer to normal growth in the year as a whole. There are some forecasters packing in some pretty high numbers for Q3, more like 4-5%. That would be good for local area retail, though it seems to me that this money is going more to the discount chains than to local, specialized retailers. I tend to watch (I call this FBWA -- Forecasting By Walking Around) some of our local stores to see who's buying, who's busy. I'd watch the bookstores, the sporting goods stores, and the electronics stores. If they look busy this summer, this story might be right. But I don't expect that. What I expect is...
  3. A pause in the first half and sluggish growth in the second half, to look like a U rather than a V. I still see elements of the credit crunch creating problems for retail in the second half -- notice that this will be to me the key area locally and nationally -- so that the share of the stimulus package that gets saved or used to reduce debt will be at least as large as in 2001. I will be looking at the budget forecast for what they are projecting for sales tax revenues for 2008-09. I think local area employment avoids being down for the year -- we have a fairly large education and health sector, which is immune to recession -- but unless retail grows more than I expect, those gains in the credit-insensitive areas will be largely offset by declines in manufacturing and construction. I don't necessarily call this a recession -- you'll note I've used 'pause' here several times -- but I don't object to the word any more.
It might come to pass that I'm more pessimistic than the state economist ... which would be a first! But I need to read the forecast first. Back after lunch with that.

UPDATE: Forgot to mention Ben Bernanke's projection:
Mr. Bernanke said �both fiscal and monetary policy face some additional constraints� relative to the start of this decade, he told the Senate Banking Committee.

In 2001, the federal government had a sizable projected surplus; it now has a deficit. In early 2001, inflation was 3.7%. Now, it�s 4.3%.

In addition, he pointed out that the negative effects of the stock market decline of 2000-2002 fell mostly on firms who pulled back on investment as a result. �In this case the consumer is taking the brunt of the effect,� because the asset in question is houses which are more important than stocks to the typical household.

Still, Mr. Bernanke has said he doesn�t project a recession this year.
Gosh, that makes me feel better...

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