The Bureau looks ahead.
After a robust performance in 1994 and a strong but slower 1995, what can we expect for the U.S. economy in 1996? What are the emerging strengths and what are the potential perils we can expect next year? How will those factors influence the economic performance of Memphis and the Mid-South? Can we expect both the U.S. and the Memphis economies to sail through another year of slow but steady growth?
Let's begin by looking at the basic components of our nation's economy. There are major components to aggregate demand: consumer expenditures, business investment, government expenditures on goods and services, and the net of exports over imports. Growth in any of these areas means overall growth in new businesses, retail sales, and employment - all the things that make up a healthy Gross Domestic Product (GDP). During the past year, there has been a modest improvement in each area of aggregate demand. But, the key word is "modest." And, the economy's performance in 1995 is important because it sets the stage for 1996.
Personal consumption expenditures are always expected to be at the heart of economic growth. They represent over two-thirds of our nation's GDP. Within the consumption category, the provision of services is responsible for nearly 60 percent of all consumption expenditures. Because of the importance of this sector, consumers have to be willing and able to purchase the goods and services that keep the economy growing.
Blue Chip Consensus 1996 Forecasts (December averages)
Real Growth Inflation (CPI) Trade (CA) Percent Change Percent Change Billions $
U.S. 2.6 2.9 -115.3 Japan 2.0 0.5 +103.8 U.K. 2.5 3.3 -3.4 Canada 2.1 2.4 -12.9 France 2.5 2.4 +10.7 Germany 2.5 2.3 -22.6 Mexico 1.6 23.9 -2.4 China (Mainland) 8.9 13.4 +0.7 China (Taiwan) 6.1 4.2 +5.2 Netherlands 2.7 2.3 +10.7 Belgium 2.4 2.3 +11.0
Source: "1995 Real GDP Growth Forecast Inches Higher, 1996 Estimate Unchanged," Blue Chip Economic Indicators. Capital Publications, Inc., Alexandria. Va., Vol. 20, No. 12, December 10, 1995.
Consumer confidence has been good in 1995 as unemployment figures stayed below 6.0 percent and employment opportunities grew modestly. However, real growth in consumption was considerably slower than it was in 1994. Part of the reason was that during most of the year, personal income grew at a significantly slower rate than it did during 1994. Finally, the ratio of inventories to sales for the entire economy rose modestly in 1995, an indication that goods were not moving as quickly as manufacturers and retailers had hoped.
Investment accounts for about 15 percent of GDP. Its three major components are residential construction, commercial building, and producers' durable equipment. Interest rates, corporate profits, business sales, and expectations all have a major influence on this component of aggregate demand. Investment is critical because the profitability of businesses and the number of employees in construction and manufacturing are closely tied to investment activity. In addition, the future capacity of the entire economy - the potential GDP - is directly related to the level of current investment.
Both 1993 and 1994 were banner years for investment. Real investment grew by more than 10 percent each year. But, during the first three quarters of 1995, some weaknesses began to appear in the investment category. While real non-residential (commercial) fixed investment continued to grow at over 10 percent when compared to the same period in 1994, residential investment fell when compared to the same period.
Can residential investments be stimulated with interest rate reductions? What impact will reductions in interest rates and improvements in corporate profits have on commercial investment activity in 1996? Corporate profits grew rapidly in 1993 and 1994, and the indicators for 1995 point to a good but less robust year. Real interest rates have declined from a peak in late 1994, as interest on most home mortgage loans, deposits, and bonds have fallen during the year.
The reduction in the federal funds rate dominated the business news at the end of the year and has probably set the stage for further reductions in 1996. But, concern remains about the adequacy of the reductions and their timing. Will they be sufficient to overcome other areas of concern? How far will the rates have to fall to stimulate this component of GDP? It seems likely that 1996 will be a year of slower investment activity, despite interest rate reductions and record corporate profits.
While the total federal debt is scheduled to pass the $5 trillion mark by the end of 1995, the actual yearly federal deficit has decreased dramatically since its peak in 1992. The federal deficit will be $161 billion in 1995, down more than $130 billion since 1992. There is clearly good and bad news to these numbers.
The good news is that there is a clear effort to bring federal expenditures into balance with receipts during this economic boom. Arguments about how to do it between the Clinton Administration and the Congress should not obscure the real progress that has been made in reducing the budget deficit.
The bad news is that smaller deficits mean that government demand for goods and services may be less than in previous years, harming the potential for economic growth. And, that is exactly what has happened. Compared to the quarters in 1994, growth in real federal expenditures has fallen each quarter in 1995. When government expenditures at the state and local levels are incorporated, the result is a wash.
The government sector should be expected to be a negative on the demand side of economic growth in 1996. In addition, the ability of the government to balance the economy has been seriously impaired by the emotional anti-deficit and anti-tax voices in Congress. If a recession were to occur in 1996 or 1997, the government would simply lack the ability to respond to the crisis in any adequate or timely manner.
On balance, the growth of exports has been very positive for the U.S. economy during 1995. Exports create new businesses and jobs in the U.S., while imports create jobs in other countries. Real exports have risen more than 10 percent for each quarter in 1995 compared to the same period in 1994. Since imports tend to be purchased at rising rates during economic booms, the imbalance between exports and imports has grown increasingly negative. As the economy slowed in 1995, that trend seems to have ended. Although exports are still less than imports, the imbalance was reduced in 1995 by the rapid growth in exports.
Gross Domestic Product
As a result of reductions in economic activity in the basic components of the nation's economy, overall economic performance for 1995 will be slower than it was in 1994. Based on real Gross Domestic Product, economic activity slowed during the first half of 1995. But, a rebound in the second half of 1995 has, at least temporarily, forestalled the likelihood that the U.S. economy could slip into a recession.
Bringing The Deficit Under Control
The actual yearly federal deficit has decreased dramatically since its peak in 1992. The federal deficit will be $161 billion in 1995, down more than $130 billion since 1992.
Percent In billion $ of outlays
1990 -221.4 17.7 1991 -269.2 20.3 1992 -290.4 21.0 1993 -255.1 18.1 1994 -203.2 13.9 1995(*) -161.0 10.6
Source: National Economic Trends, Federal Reserve Bank of St. Louis, November 1995. Exports Rose In 1995
Although exports are still less than imports, the U.S. trade imbalance was reduced in 1995 by the rapid growth in exports.
Exports in millions
Japan 48,580 56,969 Germany 18,760 20,217 France 13,665 14,405 U.K. 23,490 25,909 Canada 83,674 123,873 Mexico 28,279 47,823
* 1995 figures reflect quarters three and four of 1994 and quarters one and two of 1995.
Source: 1990 figures from U.S. Statistical Abstract, 1994; 1995 figures, Survey of Current Business, September 1995.
Some of the other economic highlights for 1995 include:
* The strength of the stock market and equity prices reflected stronger and often record profits for many corporations in America.
* The nation's banking and financial industries, faced with major disruption, closures, and takeovers since the late 1980s, gained renewed strength and stability on the basis of record profits in 1995.
* The nation's unemployment rate fluctuated in a narrow band of between 5.6 and 5.8 percent and remained under the 6.1 percent annual average for 1994. Regional recessions have all but disappeared as the strong growth of urban areas across the nation has created labor shortages for many areas of the nation.
* Inflation remained low in 1995 and is likely to end the year at less than 3.0 percent. The record for inflation in the 1990s continues to be positive in spite of high rates of industrial capacity utilization, large federal government deficits, and tight labor markets.
* After dramatic increases in 1994, interest rates (both real and nominal) continued to move down in 1995. The lingering effects of the sharp run-up of short-term interest rates engineered by the Federal Reserve in 1994 and early 1995 appear to have slowed the economy enough that no further interest rate increases were necessary. As recessionary concerns rose at year-end, the Federal Reserve started to reduce its short-term rates.
* Corporate downsizing, layoffs, and increasing employment instability created a sense of despair for many American workers. The American dream of a lifetime career path with a single employer, continuous employment, and job security was placed on the endangered species list in 1995.
* Improvements in productivity were evident in 1995 as the capital investments made in manufacturing and other sectors increased production at the same time that corporate downsizing reduced employment levels in many firms.
The current consensus forecast for 1995's real GDP is between 3.2 percent and 3.3 percent, depending upon whether you rely on the Consensus Forecasts-USA, November 13, 1995, report or Blue Chip Economic Indicators, December 10, 1995, report.(1) At the end of 1994, the Blue Chip Economic Indicators consensus forecast for 1995 was for a growth rate of only 2.7 percent. At the same time, the Bureau of Business and Economic Research (BBER) outlook was substantially closer to the real outcome for the year.
"As a result of the momentum building in 1994 and the absence of downside risk factors that would seriously impede our future growth, the BBER outlook for 1995 is for continued growth above the consensus forecast rate. Based upon recent improvements in the outlook for employment, consumption, investment, and trade, the Bureau of Business and Economic Research forecast is for 3.3 percent growth for 1995 and is at the upper range of the growth forecasts. The 3.3 percent rate forecast for 1995 is, however, above the 2.5 percent long-term rate many economists view as sustainable in a low-inflation environment."(2)
U.S. Outlook for 1996
So where does the economic performance of 1995 lead us in 1996? Are we going to see a rebirth of cost-push inflation? Will interest rates continue their downward movement? Which sectors will prosper and which will struggle in the next year? And, how will these events impact the people of Tennessee, the Mid-South, and the Memphis area?
The GDP in 1996
The Blue Chip Economic Indicators consensus outlook for GDP growth in 1996 is 2.6 percent, with a range from 3.9 percent to 1.8 percent. The 1996 consensus outlook listed in the Consensus Forecasts-USA publication is 2.7 percent, with a range of between 3.8 percent and 2.2 percent. These numbers almost mirror early forecasts presented for 1995.
By contrast, because of the instability in the employment market and the potential for rising unemployment, the BBER is slightly less optimistic about 1996 than it was about 1995. Government cutbacks, corporate downsizing, and further weakness in personal income and, consequently, consumer spending should place further downside pressure on the nation's economy. As a result, the BBER's outlook for GDP growth for 1996 is for an increase of 2.9 percent. This is 0.4 percent below our 1995 forecast but remains more optimistic than most national forecasts for the upcoming year. Presidential politics, the actions of the Fed, and the impact of investment expenditures in 1993 and 1994 lead us to feel that only a modest reduction in the nation's economy will occur in 1996.
Since the economic expansion started in 1992, the BBER inflation forecasts have been based on a belief that high rates of economic growth (above 2.5 percent), high rates of capital utilization (above 80 percent), tight labor markets (below 6 percent), rapid increases in personal incomes, higher import prices, and years of strong domestic demand would generate increasing amounts of inflation. As a result, our outlook for 1994 and 1995 was for prices to rise by 3.8 percent in 1994 and 3.5 percent in 1995. In both cases, the actual rates of inflation in consumer prices were 2.6 percent and 2.9 percent, respectively.
In 1996, Blue Chip Economic Indicators consensus forecast is for the consumer price index to rise by 2.9 percent. Consensus Forecasts - USA agrees with the 2.9 percent figure for 1996. In both publications, the high forecasts were 3.3 to 3.5 percent, and the low forecast was for a 2.4 percent increase. Once again, the BBER outlook is for inflationary pressures and market shortages to increase inflation rates above the consensus forecasts. At 3.1 percent, our outlook is for less inflation than we expected in either 1994 or 1995.
Clearly, little difference exists between the inflation forecasts, and most businesses, financial analysts, and economists would find an outcome around 3.0 percent highly acceptable. As a result, the Federal Reserve Bank will be able to combat a slowing economy by reducing interest rates and still maintain an anti-inflation policy.
The outlook for interest rates depends heavily upon assumptions about inflation, economic growth, and Federal Reserve actions. No forecasters could have anticipated the rapid escalation of interest rates in late 1994 and early 1995 caused by the Fed's actions to slow the economy.
Similarly, no forecasters can anticipate the magnitude of further reductions in interest rates if the economy slows dramatically in 1996. But, we can say that most indicators would suggest that several small interest rate reductions might be expected-in 1996. Modest increases in inflation and the absence of an alternative economic tool to stimulate the economy hint that lower rates will occur during the year.
Federal Funds Interest Rate, Annual Averages
1990 8.10% 1991 5.69% 1992 3.52% 1993 3.02% 1994 4.21% June 1995 6.00% October 1995 5.76%
Source: Federal Reserve Bulletin, January 1996, Table A26, and Statistical Abstract of the U.S., 1994, U.S. Dept. of Commerce.
Consensus forecasts have three-month T-bills at 5.2 to 5.3 percent, ten-year Treasury bonds at 6.2 percent, and corporate Aaa bonds at 7.6 percent for 1996. The Bureau believes that the extent of the downward pressure on interest will depend upon the extent and timing of the economic slowdown. If the economy adjusts slowly downward from 3.3 percent to a more sustainable growth rate, little further action to reduce interest rates will be required by the Fed.
On the other hand, if the economy slows dramatically early in the year, then more substantial interest rate reductions might be anticipated. At this point, the Bureau expects that several small additional interest rate reductions will be required to stabilize the economy in 1996 and delay the start of the next recession to 1997 or beyond.
Unemployment rates are expected to remain slightly below the 6.0 percent level that many economists call "full employment." Both consensus forecasts have national unemployment rates rising slightly from 5.6 percent in 1995 to 5.7 percent in 1996. In either case, the unemployment rate seems stubbornly resistant to further reduction except in the tightest urban labor markets. Periodic plant closures in highly-dependent and isolated rural communities will continue to place the burden of the industrial adjustment process on the backs of the areas least able to adjust to the change. Pockets of poverty and economic distress will grow as the nation's economy slows and as businesses adjust to the realities of the 1990s marketplace by downsizing, out-sourcing, and using offshore production arrangements.
Memphis 4.4 Nashville 3.3 Tennessee 4.8 U.S. 5.3
* Not seasonally adjusted.
Source: The Labor Market Report, November 1995; Tennessee Department of Employment Security.
Throughout 1996, the Bureau expects unemployment rates to slowly rise to about 5.9 percent on a year-to-year comparison basis and for the increases to reflect the slow reductions in GDP expected for the year.
1996 Outlook in Tennessee
Tennessee's good times should continue in 1996. For the fifth straight year, the economic outlook for Tennessee is for a continuation of its above-average economic performance. The slower but broad-based economic growth and expansion expected for 1996 should help the state continue to close the employment and income gaps that exist between Tennessee and the rest of the nation.
While, in general, both rural and urban areas of the state should continue to prosper, isolated and highly-dependent rural communities may encounter difficulties as the manufacturing base of the state's economy slows during the year. Rural market centers with a diversified economic base should continue to prosper because of the continued growth in the trade and service sectors. However, as the nation's economy slows, the region's interest-rate sensitive industries may benefit from reductions in interest rates. To the extent that agricultural prices, farm support systems, and commodity production levels combine to produce both farm and farm-related employment and income opportunities, most rural communities will have a good year in 1996.
Historically, the strong growth in manufacturing has been the key to the state's economic performance. This sector will slow in 1996 to reflect slower economic conditions in the national and regional markets which most of our companies serve. International competition should be expected to intensify as the movement of capital increases and trade barriers decline.
The I-65/I-75 automotive industry corridor has provided enormous economy vitality to the heartland of Tennessee. If the industry declines substantially in 1996, the ripple effect could seriously reduce the economic prosperity many Middle Tennessee residents have grown to expect.
The trade (retail and wholesale) and services industries will once again generate most of the new job opportunities in Tennessee. Throughout 1995, it was employment growth in the trade and services sectors that created most of the new jobs in the state. The strong banking, health care, and transportation sectors should contribute to the statewide growth expected in 1996.
Labor Shortages Will Hurt
One negative factor that should be mentioned is that labor shortages, especially for skilled workers, will continue to slow the state's economic expansion. More than ever before, the primary determinant of the success of Tennessee's economic development initiatives will be how well we educate and train our citizens. Nearly every day, employers across the state announce new plants and capital investments which require more highly-skilled workers at all employment levels. Every day, employers complain about the shortage of qualified workers available to fill the jobs being created.
Historically, Tennessee and other Southern states benefited from having an abundance of low-skilled, low-wage, and non-union labor. Employers moved to the South to take advantage of those attributes of the labor force and to avoid the disadvantages represented by workers in highly-unionized, high-wage areas of the industrial North. Now, economic forces have combined to change the face of the typical Southern labor market. On the supply side, workers are better trained and educated than ever before. Enormous investments in human capital have helped Southern workers close the education and training gaps that existed in the past. As a result of the gains, Southern workers are more productive than ever before and can demand higher wages in the marketplace. In addition, the boundaries of the marketplace have grown as the workers have become increasingly competitive for employment opportunities wherever they exist.
On the demand side, employers faced with rising wages and expanded labor markets have responded by either fleeing to other frequently offshore markets or by investing in capital equipment to take advantage of the higher quality labor force that is available throughout the region.
Unfortunately, employers can change the nature of the demand for workers much faster than workers can obtain the skills required by the jobs. As a result, mismatches between the demands of employers and the skills of workers continue to put pressure on the labor market. It is this pressure on the labor market that generates the forces which result in changes in our investments in human capital.
Putting in place a workforce development program which takes maximum advantage of our state's strong economic performance will be a challenge in 1996. Developing a coordinated, effective, and efficient workforce development system that can match the skills of our workforce with the needs of 21st century employers will be an important step in insuring the economic future of all of the state's citizens.
Where Memphis Worked In 1995
Employment by industry in the Memphis MSA
% of total
Manufacturing 12.5 TCPI(*) 10.1 Wholesale/retail trade 26.3 FIRE(**) 5.1 Services 26.8 Government 15.3 Construction 3.9
Total non-agricultural labor force 516,500
November 1995 data. * Transportation, Communications, Public Utilities. ** Finance, Insurance, Real Estate.
Source: The Labor Market Report, November 1995; Tennessee Department of Employment Security.
The Local Economy in 1996
The Memphis MSA outlook for 1996 is for a continuation of the slow, steady growth the community has experienced since 1991. With only minor reductions in the growth of the nation's GDP expected in 1996 and with no recession in sight, Memphis should continue to expand along its long-term growth path. Throughout the year, periodic closure announcements - such as the Defense Depot - will offset the plant expansion and relocation news we receive - Birmingham Steel, for example. But, in general, the city should expect to see employment increase by 7,500 to 10,000 jobs and should expect to see unemployment rates remain low. Most of Memphis' largest public- and private-sector employers are stable and profitable. They should continue to grow and create employment opportunities in 1996. These increases in employment should be sufficient to absorb additions to the labor force and any workers displaced by closures or by downsizing during the year.
Employers should expect to continue to find it difficult to recruit highly-trained or skilled workers in the Memphis marketplace. A surplus of highly-skilled workers simply does not exist. And as yet, no meaningful local initiative has been put in place to generate more highly-trained and educated workers. As a result, local firms will continue to find themselves forced to compete with each other for workers or recruit in a broader labor market. Capital substitution for labor should occur as local wages and labor costs rise and employers respond to the absence of qualified employees.
On the other hand, there is clearly a surplus of unskilled and poorly-educated labor available in the Memphis region. And much of our economic growth has been based on this hard-working group of employees. As in the past, the critical challenge will be transforming this group of workers into the skilled labor needed by employers in the future.
Overall, 1996 should continue to be a positive growth year for Memphis and the Mid-South. Many positive announcements about expanding industries, new public infrastructure, and the positive momentum started in 1992 should carry forward into 1996. Nothing is expected to cause the community to deviate from its long-term growth path. No single change in the nation's economy is expected that would cause Memphis to have anything other than a prosperous new year.
1 It should be noted that 1995 was a period of adjustment for all Gross Domestic Product forecasters. Official statistics on GDP, historically measured with fixed weights, have been recomputed to improve their accuracy. The new chain-weighted measures that reflect the economy's performance will initially seem to lower real growth rates. As a result, GDP forecasts for last year will overstate year-end chain-weighted GDP measures.
2 John Gnuschke, "The Expansion Keeps Rolling Along," Business Perspectives, Vol. 8, No. 1, December 1994, p. 3.
RELATED ARTICLE: The Memphis Economy: Promises and Perils for 1996
* Manufacturing. The arrival of Birmingham Steel will stimulate interest in the under-utilized manufacturing sector of the Memphis economy and may lead to its rebirth.
* Finance. Memphis enters the second half of the decade with a strong banking/finance community and the capital infrastructure necessary for regional economic growth.
* Transportation. While other cities attempt to copy Memphis, our city still possesses a powerful advantage: a high-quality road, rail, water, and air transportation infrastructure. Federal Express will continue to be the largest and most important employer in the Memphis area.
* International Business. With water connections to the South, FedEx building volume to the Far East, and Northwest increasing its service to Europe, international business in Memphis should continue to gain strength.
* Paper. With the continued success of the regional operating headquarters of International Paper, Memphis signals to other companies that it can be the center of operations for an efficient corporate organization.
* Construction. Lower interest rates will stimulate residential construction and sales, while the continued growth of wholesale and retail trade will escalate commercial construction.
* Downtown and Out East. Memphis' twin cities are both healthy and growing and will continue to prosper in 1996. Look for the announcement of new developments in both areas.
* Federal Government Cuts. The continued downsizing of the federal government will have major impact on the Memphis-area economy. The closing of the Defense Depot and the Naval facilities at Millington will hurt local growth, as will other cuts to come - in welfare, social security, and Medicare.
* Gaming. Tunica could reach an entertainment plateau and find that attracting outside gamblers is stymied by too many gaming sites around the country. The result: a cycle of destructive competition among the surviving gaming companies in Tunica.
* The Medical Community. Two Ms provide possibilities for peril in the year ahead. The Med finds it needs a partner to survive; it offers great specialty departments and is the site of much of UT's physician training, but local chains fear a merger could spread the Med's union virus. Managed care will contribute to a continued deterioration of the old fee-for-service pattern of medicine. The two health care giants, Baptist and Methodist, will remain strong in the year to come but will face real challenges throughout the year.
* Transportation. Competitive pressures reduce trucking profits and flexibility. Placing all passenger eggs in the Northwest basket could prove highly risky, given the fact that major airlines have only been profitable during two periods in the 1990s. UPS and other companies will continue their assault on FedEx's hegemony of the small package market and may find more success in 1996.
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|Title Annotation:||economic forecasts by the Bureau of Business and Economic Research at the University of Memphis, TN|
|Author:||Gnuschke, John; Ciscel, David H.|
|Date:||Jan 1, 1996|
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