The Power of America—What Needs to Change?
John Gnuschke, PH.D., Director
Sparks Bureau of Business & Economic Research
The University of Memphis
Economic foundations Made America Great and will Keep America Great. Basic economic principles define how individual freedoms generate the best future for the nation. Granting too much importance to the government at any level while ignoring the power of the economy and the importance of consumers and businesses is just misplaced emphasis. While important, the government is still a small part of the overall economy. The outlook for 2017 and beyond should focus on building the economic strength of the nation. The economic actions of individuals and businesses will Keep America Great—just as has always been the case. More government interference in the economy is not what is needed in 2017. The nation will grow and prosper when we release the power of individuals and businesses to make decisions free of government interference.
After the Great Recession, the outlook for the economy appeared bleak and the prospects for returning to a prolonged period of economic growth seemed unlikely. But, the post-Great Recession period has turned out to be one of rapid global trade expansion, stable growth, low inflation, low interest rates, and declining unemployment. Record-setting stock markets, powerful corporate profits, and the strong recovery of the labor market have led the way for income gains for most groups.
While economic growth has occurred in the Mid-South and communities in dire need of new employment and income opportunities, there is room to grow. In general, the economic groups who benefitted from the recovery have been satisfied with the economic progress being made. But other, less satisfied groups seemed to have one thing in common—a belief that they were left behind by the changes taking place in the economy. So what should President Trump do about this?
The Role of Government
The new president and his administration have been charged with changing the direction of the nation—Make America Great Again. But, a contradiction exists over how the nation should change and who should be responsible for making sure the changes occur. Should we have a government that focuses on the fairness of corporate decisions or a government that focuses on creating economic prosperity for all? Should the government be interfering with the decisions of individual businesses or leave those decisions to the business leaders charged with meeting the highly-competitive demands of the global marketplace?
Many business and political leaders believe that the role and size of government should be reduced and that government interference with the marketplace in general and business decisions in specific would actually Make America Worse. Making government responsible for individual and business decisions is believed to be a bad idea that will only interfere with individual freedom, free markets, and competition in a global marketplace.
Government is not the engine that Makes America Great. With some exceptions, government needs to stay out of interfering with the decisions of individuals and businesses. Self-interest and profit motivations make this nation’s economy work. Competition requires that companies make the very best decisions regarding production locations, wages, and other things. Business decisions are best left to the leadership of businesses and individual actors. But, if 2017 brings on a sustained period of government interference, then 2017 may start a period of steady economic decline.
It seems likely that changes in 2017 will occur in the role of government, but the direction of the changes remains to be seen. With a reduced focus on government and an increased focus on business, the administration could find the secret to expanding opportunities for all segments of the population.
Working to make the nation grow more rapidly would be the best thing government could do to help the nation. Good political and bad economic decisions can and frequently do go hand in hand. Avoiding bad decisions will be the real challenge for government in 2017. Addressing the nation’s economic challenges will not be done with walls. It will be done with improved educational opportunities and improved job skills for workers.
The Role of Trade
Trade has made America great, and expanding trade has been the bipartisan pursuit for over 80 years. The failure to continue to do so would be a severe mistake with enormous consequences for America and the world. (Fred Smith, Memphis Business Journal, December 9, 2016. Ed Arnold)
One nation cannot prosper while the rest of the world stagnates. The global economy is not independent of the U.S., and our actions will impact the outlook for other nations. But, those actions will not change the fact that the strength of the nation is in its economic power, and the actions of other nations can impact the economic and political balance of power around the world.
Inflation associated with the evidence of some wage gains and the potential for deficit spending has already caused the Federal Reserve Bank to increase interest rates. The timing of the impact of higher interest rate increases, tax reductions, and deficit spending varies. Spending programs take longer to implement, and the long-term benefits take more time to be realized. But, higher interest rates and tax reductions can rapidly impact markets and the economy.
The willingness of the Fed to raise interest rates may more than offset the delayed gains from any fiscal stimulus. The Fed has a history of excessive contractions and expansions, and this period seems no different than prior periods. The higher interest rates go, the
more likely it is that the Fed will slow the economy before it gains momentum. The risk of a significant slowdown or a recession in 2018-19 will increase as rising interest rates slow the real estate market and other interest-rate-sensitive segments of the economy.
The rising economic and political risks in global markets may combine with the higher returns in U.S. markets to attract risk-averse global capital investors. If so, this pattern will require additional interest rate increases. Higher interest rates will make U.S. bonds more attractive and help reduce the already evident excesses in stock prices. The risk of one or more major corrections in stock prices will rise as economic and political uncertainty increases in 2017.
National Economic Outlook for 2017
The nation cannot grow at a sustainable 4.0 percent rate without incurring the rising risk of inflation in an over-inflated economy. It is highly unlikely that the post-election euphoria will continue throughout 2017. Temporary stock price gains will accelerate the risk that a financial bubble will burst in the coming months. Financial institutions are already beginning to push higher-risk products in search of higher profits. The risk of a repeat of the excesses of the Great Recession is rising. The nation has been here before but seems unwilling to recognize the risk of another round of excessive stimulus driven by lax financial industry controls, low interest rates, tax cuts, and deficit spending. This nation is too big to fail, but it is not too big to have a repeat of the economic setbacks of the recent past.
Gross Domestic Product
The nation’s real GDP is expected to increase to an annual rate of 2.3 percent in 2017 (Consensus Forecasts—USA, January 9, 2017). The Consensus Forecasts are a compilation of 25-30 of the nation’s top economic forecasters representing many of the nation’s largest businesses, financial institutions, universities, and private forecasting organizations. The consensus estimates range from a high of 3.0 percent to a low of 1.7 percent. Given the positive growth trends for the last four years, the 2017 rate should be higher than the growth rate for 2016 (forecast to be 1.6%), but still far short of the new administration’s goal of 4.0 percent. Sustaining growth rates in excess of 3.0 percent in a low-inflation environment is highly unlikely in 2017.
Unknowns about policy direction in 2017 will increase uncertainty in most business and consumer markets. Higher risks in global markets will combine with higher interest rates and delayed fiscal policy actions in domestic markets to limit the upside gains many anticipate. In recent forecast periods, economic stability has reduced the range and increased the accuracy of forecasts of economic activity. But, times are changing, and the ability of forecasters to accurately anticipate the movement and direction of the economy is less likely in 2017. Consumer spending, always the engine of the economy, will continue to grow in 2017. Consumer confidence remains positive and is an important factor in determining the direction of the economy. Risk of a downturn will rise, but the impact on consumers should not appear in 2017.
Consumer prices are expected to rise by 2.4 percent in 2017—above the Fed’s target rate of 2.0 percent. Tight labor markets will cause wages to rise, and the lack of offsetting productivity increases will cause product prices to increase across the board. Employment wage and benefit packages will increase as fewer new and well-prepared workers will be available to fill job openings. Full employment will put pressure on employers to retain more mobile workers and compete for the best employees. Income increases will be a welcome relief from the post-recession decade, but the gains will increase inflation and all its associate actions. Unfortunately the rising cost of living will offset many of the income gains experienced by consumers. Oil price increases will generate real income declines in 2017 but will stimulate the economies of oil-producing states.
Unemployment rates are expected to remain low despite additional workers returning to the labor force. Some of the reduction in the unemployment rate experienced since the Great Recession was associated with a reduction in labor force participation as discouraged workers dropped out of a weak labor market (Chart 1). But, rising wages associated with nearly full employment will cause some people to return to the labor force and will prevent unemployment rates from continuing to fall in 2017. Tight labor markets will keep the level of unemployment near a combined structural and frictional level of 4.0-5.0 percent.
The outlook for interest rates is that they will rise as the shift in economic policy from a monetary focus to an expansionary fiscal policy—reduced taxes, higher spending, and bigger deficits—takes place. Higher interest rates will help combat the effect of expansionary fiscal policy and keep markets in check. But, the Fed has a track record of destroying economic expansions without preventing short-term inflation or without helping level the playing field for most people in the country.
Increasingly-risky financial products will continue to appear in 2017 as the struggle to generate higher rates of return pressure financial institutions to expand real estate and business lending. Banking stocks are rebounding and that suggests that profits are returning and the pressure to push money out into the increasingly-risky market will rise in 2017. Higher-risk lending will accelerate the timing of the next recession—2018 or later. While independence is a key to the Fed’s monetary policy, narrow inflation and unemployment goals and a recent multi-year, low-interest-rate policy will amplify public reactions to any actions taken.
While the post-election euphoria will wear off quickly, the economic momentum has already been put in place for a sustained GDP growth of 2.5-3.0 percent in 2017. Current economic conditions suggest that GDP growth in 2017 will be at the high end of expectations. The security of the U.S. bond market and rising rates of return will increase the nation’s attractiveness as a safe haven for foreign investors and will reduce the impact of higher interest rates.
In Summary, What Can We Expect in 2017?
It is time to focus on the economy in 2017. The power of our nation and every nation rests on economics and the ability to compete in a global marketplace. The most likely scenario for 2017 is that the growth rates and economic performance of the nation already in place in 2016 will continue unchanged. Long-term structural changes to the economy will not happen this year nor should they. The power of the global marketplace and its performance will determine the performance of the U.S. economy. Existing trade agreements between this nation and the global economy may be modified but will generally remain in place. Slow, steady economic growth will continue with rising interest rates, tight labor markets, strong corporate profits, increasing stock prices, rising oil prices, and expanding global trade all taking place in 2017
Economic Outlook for Memphis in 2017
The strength of the Memphis economy always depends on the nation’s economic performance. The 2017 outlook for Memphis reflects the modest growth forecast for national and international markets. Memphis cannot grow and prosper without strong growth in other markets. The history of the city’s economy is for slow but manageable growth.
Memphis depends heavily on jobs to generate income for a quarter of a million local households. Job generation will be the most important economic issue in 2017. Memphis 2005, a local planning initiative that ran from 1995-2005, had a job growth goal of 10,000 net new jobs per year. Job growth surpassed that goal repeatedly in the 90s, but began to decline with the tech recession and the jobless recovery that started in 2000.
Year after year the community’s job creation efforts have been sufficient to keep the economy stable, but not sufficient to help it address or eliminate other economic and social problems. If local jobs had increased by 10,000 per year since 2000, over 170,000 new jobs would have been created in Memphis by the end of 2017. The Memphis employment base would have grown by 25.0 percent, and total jobs would have approached 790,000 instead of the 640,000 that are expected to exist in 2017.
Job growth can and does take place in Memphis. The city has experienced years of job growth in excess of 10,000 net new jobs. Economic development organizations work hard to be successful and frequently lack the support they need to achieve the growth goals set by the community. Job creation goals get lost in the mire of day-to-day operations, but their importance remains a top priority for local elected officials, economic development organizations, and the community. The one goal that could change the future of the city is job creation.
The Memphis economy suffered a serious setback from the Great Recession. Most Memphians do not understand the magnitude of the setback and the prolonged impact of the recession on employment locally. The annual employment data shown in Chart 1 indicate that the brief 2000-2001 recession cost Memphis over 11,000 jobs, and it took five years to recover. As the economy regained its strength from 2004 to 2006, jobs in Memphis increased by 20,800—evidence that the Memphis 2005 goals were still attainable. The peak of the expansion started to erode in 2007 when only 3,600 jobs were created. Over the next three years, 49,600 jobs were lost in Memphis. All the job gains from a decade or more of hard work were wiped out by the losses associated with the Great Recession.
Since 2010, employment has increased steadily—expanding at an average annual rate of 6,800 jobs between 2010 and 2015. Employment levels in 2015 were once again nearly equal to the levels that occurred in 2000 and 2005. If 2016 growth ends up being close to 7,000 new jobs (still uncertain), the six-year post-recession recovery will have generated 41,200 jobs—nearly enough to offset the losses the community experienced as a result of the Great Recession.
Multiple years of job growth are a clear sign that the community’s economic development efforts are being rewarded, but two recessions since 2000 have made job growth an elusive goal. The number of jobs in Memphis in 2016 was still less than the pre-recession peak in 2007, and the pace of job growth has not been sufficient to address the other complex issues facing the city—poverty, health, crime, and urban decay, to name a few.
The outlook for 2017 is for a continuation of the growth path of the last six years—a positive increase of 7,000 net new jobs. The forecasted 2017 growth will push the Memphis employment numbers beyond the pre-recession peak. The community will write a new history in 2017—seven years of economic expansion with more jobs than ever before.
The post-2010 job creation rate of 7,000 new jobs per year has been a tremendous boost to the local economy. The job creation rate is slightly more than 1.0 percent growth. By comparison, 2.0 percent growth on a 650,000 base would equal 13,000 jobs, a much larger but attainable goal. The impact of an additional 6,000 new jobs (Table 1) would mean not only the direct 6,000 new jobs, but also an additional 1,394 jobs as these 6,000 new workers spend their incomes in the local community from an additional $66.0 million in labor income, causing the creation of an additional $179.3 million in output (the value of goods and services created).
The creation of jobs is an interaction between supply and demand factors for the economy. A tight local labor market, shown by the unemployment data in Chart 2, causes employment cost increases for employers and constrains the growth that might be expected in 2017. Labor shortages for skilled-jobs will also limit the job gains that can be possible.
Memphis benefits from a diversified economic base with sectors that expand and contract independent of each other. When one sector contracts, another sector may grow. As the decades-long structural losses in manufacturing took place in Memphis (Chart 3), other industries like health care, transportation, and logistics
grew to offset the losses. New industries have become the backbone of the city’s economy. FedEx, International Paper, AutoZone, and other major international corporations are a large part of the community’s economic base and explain its stability. While it remains important and is a potential growth sector, manufacturing has been a small, stable segment of the local economy for decades. The outlook for the economy in 2017 may be uncertain, but the base of employment in Memphis will continue to depend on a strong and diverse group of employers that make job creation a reality.
Summary for the Memphis Economy
While the Memphis economy suffers from periodic national recessions, no evidence exists of a negative structural shift in the economic base or of the lack of flexibility in that base. The economic base of Memphis is not in decay but, instead, is in a pattern of evolution that reflects changing market conditions and opportunities. Memphis is competing to grow in an increasingly competitive global marketplace. The outlook for 2017 is for a continuation of modest economic growth and for a continuation of job creation consistent with the record of the last six years.
The community should have an opportunity to expand support for those groups tasked with attracting new and expanding existing employers. Economic development groups must have the level of support necessary to achieve higher goals. Memphis will continue to struggle with modest economic growth in the future unless the community expands its efforts to create more and better jobs.
The community also has a chance to expand support for higher education in Memphis. The economic impact of a college degree is a powerful argument for the expansion of higher education opportunities for Memphians. Using local tax support to improve local universities would pay both short- and long-term benefits for the community. Strong universities are an essential part of the community’s efforts to build a world-class economy. The success of the community’s efforts to attract new and grow existing employers should include efforts to address the needs of higher education.