A Time to Reflect:

What can we expect from the economy and what do we expect

from government?

George A. ErickcekW.E. Upjohn Institute for Employment Research

October 28, 2013

Outline

• Yes we are growing, but can’t we go faster?• Three scary charts• Michigan’s performance and outlook are still

promising.• Local situation – Not bad, not great• Reconsider the role of government

2

GDP grew by 2.5 percent in the second quarter, and the forecast is positive.

3

Solid footing in the 2nd Quarter: strong exports, improved business investment, and solid consumer spending

Employment conditions have improved; however, the number of job seekers per opening is still

double what it was in 2008.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

1

2

3

4

5

6

7

8

Number of Job Seekers to Job Openings

4

Unemployment is falling, but there are still too many long-term unemployed workers.

5

1st Scary Chart: Being unemployed for more than six months is bad for your health.

194819511954195819611964196819711974197819811984198819911994199820012004200820110

5

10

15

20

25

30

35

40

45

50

Percent Unemployed More than 27 Weeks

The good news is that the percentage has been falling.

6Source: BLS CES.

Consumers appear to be holding more debt and not feeling that good about it.

2007

2008

2009

2010

2011

2012

2013

-25-20-15-10

-505

10152025

0

20

40

60

80

100

120

Consumer Confidence and Change in Consumer Debt

Consumer debt Consumer confidence

Billi

ons

($)

Inde

x: 1

995

= 10

0

7Source: Conference Board and the Federal Reserve.

Currently, consumer confidence stands at 79.7.

Prices look pretty flat.

2003 2003 2004 2005 2006 2006 2007 2008 2009 2009 2010 2011 2012 2012 2013-3

-2

-1

0

1

2

3

4

5

6Change in the Consumer Price Index

12-m

onth

per

cent

cha

nge

All Goods and Services

Less energy and food

8

Interest rates are moving upward but are still at historically low levels.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

1

2

3

4

5

6

7

8

9%

30-yr mortgage rate

10-yr Treasury Bond90-day Treasuries

9

However… something is wrong

10

2nd Scary Chart: Banks are still holding more than a trillion dollars in excess reserves…and it is going up.

1997 2002 2007 20120

200400600800

1,0001,2001,4001,6001,8002,000

Total and Required Reserves at the Federal Reserve

Total reserves Required reserves

$ Bi

llion

s

11Source: Federal Reserve.

3nd Scary Chart: Corporations are making money without hiring workers—a clear break

from past years.

1948195219571962196719711976198119861990199520002005200982%

84%

86%

88%

90%

92%

94%

96%

98%

100%

0%

2%

4%

6%

8%

10%

12%

14%

Employment Rate and Corporate Profits

Employment rate Corporate profits

Empl

oym

ent

rate

Corp

. pro

fits p

ct. o

f GDP

12

There’s another problem.

• Last year, the top 1 percent of Americans took home 22 percent of the nation’s income; the top 0.1 percent, 11 percent. Ninety-five percent of all income gains since 2009 have gone to the top 1 percent.

• Median income in America hasn’t budged in almost a quarter-century. The typical American man makes less than he did 45 years ago (after adjusting for inflation).

• Men who graduated from high school but don’t have four-year college degrees make almost 40 percent less than they did four decades ago.

Joseph E. Stiglitz, New York Times, 10/13/13

13

Turning to Michigan

• 2012 Employment Growth: 71,410 total jobs created, up 1.8%

27,260 manufacturing jobs, up 5.3%

• As of July of this year: 40,800 jobs have been created10,300 manufacturing jobs

• U of M’s Forecast is positive. 69,300 additional jobs in 2013

54,900 additional jobs in 2014

14Source: University of Michigan.

During the past four quarters, the state's employment has increased by 42,000.

GovernmentOther services

Leisure & hospitalityEducation & health

Business & professionalFinancial

InformationTransportation & utilities

RetailWholesale

ManufacturingConstruction

Total

-10 0 10 20 30 40 50

Employment Change, 2nd Quarter 2012 to 2nd Quarter 2013

Employment (in 000s)

15

Source: Michigan Labor Market Information, CES.

Implied manufacturing multiplier is 2.5.

Employment has expanded since the end of the recession. Since July 2009, employers have added 255,000 jobs.

However, 408,000 jobs were lost during the recession.

16Source: BLS and Upjohn Institute.

255,000 jobs

Auto sales continue to pick up.

17Source: BEA.

The auto outlook is promising.

• The current fleet on the road is old, very old–11.4 years.

• Incentives are back.• Trade-in values remain strong.• New selections – there will be 40 new

launches in 2014.• Financing is available.

18

Construction activity has a long way to go.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

10,000

20,000

30,000

40,000

50,000

60,000

Number of Building Permits Issued*

Total units Single family

* 2013 estimate based on activity during the first 5 months.Source: U.S. Census.19

Turning to South Haven and Van Buren County

20

Employment conditions appear to be improving in Van Buren County

20072007

20072008

20082008

20092009

20092010

20102010

20112011

20112012

20122012

20132013

0

2

4

6

8

10

12

14

16

Unemployment Rate, 2007–Present (12-month moving average)

United States Michigan Van Buren

Source: MI Labor Market Indicators, Local Area Unemployment Statistics.21

Job posting are clearly up. Medical provides a needed level of stability

Q4 2012 67 Total

Q1 2013 95 Total

Q2 2013 122 Total

Q3 2013 196 Total

0

20

40

60

80

100

120

Online Job Postings

Medical Food, Hotel, Retail Other

Source: Burning Glass Labor Insight.22

The county’s unemployment has been falling but for the wrong reason until 2012.

End of AugustAugust-to-August

Labor Force ChangeAugust-to-August

Employment Change

August-to-August Change in the Unemployed

2011 -670 -264 -406

2012 -804 -236 -568

2013 7 391 -384

Source: MI Labor Market Indicators, Local Area Unemployment Statistics.23

What happened in Finance and insurance?

Government

Accommodation and food

Health care

Admin. and waste

Prof and tech.

Finance and insurance

Retail trade

Manufacturing

Mining

Total, all industries

-700 -600 -500 -400 -300 -200 -100 0 100 200

Industry Employment Change, 2011-2012

Source: MI Labor Market Indicators, Quarterly Census of Employment and Wages.24

Major swings in employment is the status quo.

20072007

20072008

20082009

20092009

20102010

20112011

20122012

20120

50

100

150

200

250

300

350

400

0

500

1,000

1,500

2,000

2,500

Accommodation and Food Service Employment

Accommodation Food service

Acco

mm

odati

on e

mpl

oym

ent

Food

serv

ice

empl

oym

ent

Accommodation has a shorter sea-son but a 200% increase from Janu-ary to June.

Food Services employ, roughly, 550 additional persons during peak times; about 35% more than winter.

Source: MI Labor Market Indicators, Quarterly Census of Employment and Wages.25

The county has avoided the “dip” in the educational attainment of younger adults.

Van Buren County Michigan United States0

5

10

15

20

25

30

35

40

45

Educational Attainment, Associate’s or Higher

25 to 34 35 to 44 45 to 64 65 and higher

Pct.

of a

ge g

roup

Source: Burning Glass Labor Insight.26

Role of government

• I think there is general agreement that government should provide:– Defense – Protection of freedoms (however, the level is

debatable)– A fair legal structure– A monetary system– Public goods – goods that would be ill provided by

individuals/companies on their own.• Transportation• Education• Safety inspections• Parks

27

Role of government

• Not so much agreement:– Economic Policy: Countercyclical activity

• Tax cuts vs. government spending – Tax cuts are seldom temporary.

• Targeting or subsidizing industries – Agricultural price supports

• Cyclical deficits vs. structural deficits– When do we know that the debt is too high?

Inflation and a falling currency relative to other world currencies

28

Role of government

• Not so much agreement:– Social welfare programs such as social security,

Medicare, Medicaid, food stamps, general public assistance, unemployment insurance

• Worries about incentives• Worries about equity• Worries about spillover effects – Who pays for

overutilization of emergency rooms and overcrowded prisons?

29

Role of government

• However, everyone will agree that government should NOT add uncertainty to the economic system.

There can be honest disagreement about tax policy and its potential impact on business activity.

It is in the interest of no one for government to raise the level of uncertainty to such heights that it negatively impacts businesses and consumers.

30

A Time to Reflect:

What can we expect from the economy and what do we expect

from government?

George A. ErickcekW.E. Upjohn Institute for Employment Research

October 28, 2013