U.S. Economy Endures Slowest GDP Growth in Two Years
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RAY SUAREZ: News of slowing growth in the gross domestic product comes at the same time as decreasing consumer confidence, a still hot housing market, and continuing highs in energy prices. We take a look at what’s happening in the nation’s economy through three regional economic snapshots.
Carl Tannenbaum follows the Midwest as chief economist for LaSalle Bank in Chicago. Dawn McLaren is a research economist at the Seidman Research Institute at Arizona State University and studies the southwest’s economy. And Anirban Basu is CEO of Sage Policy Group, a consulting firm in Baltimore, Maryland; he tracks the Mid Atlantic states.
And Anirban Basu, maybe we can go from East to West tonight. When you got news that the economy is still growing but at a slower rate than before, how did you see that when you looked at your own region?
ANIRBAN BASU: Well, our region, I think, has held up pretty well. I tracked the states of Virginia, Maryland, Delaware, Pennsylvania, West Virginia and the District of Columbia and by and large the economies of the mid-Atlantic region have outperformed the nation, you’ll find one of the lowest unemployment rate in Virginia, just 3.3 percent and in Maryland the unemployment rate is just 4.3 percent, both driven by the federal spending dollar.
And a big story in this region I think is Delaware, just three counties, less than a million people, but an incredibly diverse economy for all that. That’s an economy with only a 3.9 percent unemployment rate and West Virginia and Virginia — West Virginia and Pennsylvania have unemployment rates very similar to the national rate of unemployment.
RAY SUAREZ: Well, what in the national trends leaves places like West Virginia and Pennsylvania more vulnerable?
ANIRBAN BASU: Well, those states have been vulnerable; they’ve been growing more slowly than the balance of the mid-Atlantic region. They don’t have the economic driver that Maryland and Virginia do in the form of the federal dollar, and they don’t have the drivers that Delaware has in the form of that consumer finance industry.
So Pennsylvania, you’ll see and Philadelphia one of the slowest employment growth rates in the country, you will see the same thing in Pittsburgh, Pennsylvania. In 1900, Pittsburgh produced half of the nation’s glass and half of the nation’s iron and two-thirds of its steel. And that’s there’s been a violent transformation from that economy, and so it’s still transitioning to a new economy.
RAY SUAREZ: Carl Tannenbaum, break it down for us in the upper Midwest.
CARL TANNENBAUM: Well, the good news is that over the last generation, the rust belt here in the Midwest has been diversified with a lot of smaller companies and service firms, and so we’re less vulnerable to high energy prices and manufacturing trends than we used to be.
Nonetheless, this region still has more manufacturing on average than other regions and as a result we’re a little bit behind the national average. Unemployed rates in Michigan and Ohio, I believe, were in the top five in the country. And as a result we’re seeing a little bit of under performance.
The good news is that in places like Chicago, the rebound and things like business travel and also business equipment spending have helped. Firms that are manufacturing things that don’t have to do with autos also report very, very good results. But that is a caveat that’s very important. The news related to GM and Ford has not been the best. And that ripples through the economy through the parts suppliers that make things that go into their vehicles and also the many ancillary businesses and employees that are on pins and needles seeing what the end game is going to be for those two companies.
RAY SUAREZ: During the past several years there’s been so much talk about a manufacturing recession, even as other parts of the economy were prospering. In the part of the country that you track, as unemployed people have gotten back to work, have they gone back to work in manufacturing or in new sectors of the economy?
CARL TANNENBAUM: Typically, they’ve gone to work in other sectors, that’s been our regional challenge for a very long time; there’s a central point that I need to make though. Manufacturing output in the United States is at a record level. And, by that measure, that sector is doing very well.
Manufacturing employment though continues to decline, a trend that is now in its 7th decade — long before China became a communist country, we were losing manufacturing jobs not because of trade practices, but because factories have become much more efficient. So the challenge has been for our region there for a long time: retraining and directing people who had been working in factories to new applications.
RAY SUAREZ: And Dawn McLaren, how does that news of the wider national economy fit with what you’re seeing in Phoenix?
DAWN McLAREN: Well, here in Phoenix and the Southwest, we are doing very, very well. In terms of job growth, we are number one in the nation for Nevada, number two in Arizona. So we’re doing very well out here. The concern that I have is that most of our job growth is in terms of construction. We are having a housing boom. We have seen housing prices rising incredibly.
In Las Vegas, for instance we’re seeing houses prices 40 percent above what they were last year, an incredible boom going on in prices and in a number of houses being built. And we’re going to have to think about retraining some of these people when that huge boom comes to an end.
RAY SUAREZ: When you say comes to an end, is there something waiting in the economy to ambush that boom, or is it just a natural cycle where it will hit a valley at some point?
DAWN McLAREN: Well, I do feel that we do have a little bit of a bubble here, certainly in some areas like Las Vegas it will be a little bit worse. There are things that are threatening to it. First of all, over 20 percent of our market here in the Phoenix area is in investment. Investors have come in, they’ve come in from California, and they have been drying our market.
If the stock market starts to look good again, they could move their money over and go back into the stock market where they can make a good deal of money there instead of in our market where they are making a great deal of money in our real estate. There are also rising interest rates that will stop people from moving from house to house; rather than move to a different house, they’ll keep the old interest rates rather than move to a new house that has a higher interest rate. So that is also a threat to our housing market.
Once that comes to an end, which it can’t go on forever and there are signs that it is beginning to fizzle, I don’t think it’s something that’s going to pop and be a dramatic panic. I think it’s something where we’re going to see housing prices level off, and wait for personal income to catch up to where those housing prices have come because in the long run, personal income and housing prices do tend to grow at about the same rate.
RAY SUAREZ: Anirban Basu –
DAWN McLAREN: So, we can wait for that.
RAY SUAREZ: I’m sorry, I thought you had paused there. Anirban Basu, has housing also been a driver of economic growth in parts of the Mid Atlantic?
ANIRBAN BASU: It absolutely has been. The Washington area has created in the last 12 months about 77,000 jobs, and you have to put those people somewhere. And many of those people have ended up in Louden County, Virginia, arguably the fastest growing county in the country. You also see a lot of second home purchases in places like Sussex County, Delaware, which is a home to the beach towns, and where you see a lot of construction of second homes.
RAY SUAREZ: What about the upper Midwest, Carl Tannenbaum? This is a place that’s been known for being affordable for a long time. Are there winners and losers in your region?
CARL TANNENBAUM: Generally housing remains both affordable and very busy. Construction is also one of our region’s strongest areas. Reasons for that are very simple. Mortgage rates are very low, and the public policies that we have that promote homeownership for a variety of reasons also assist people into getting into homes.
I don’t think we have as much of a bubble-like condition as my colleagues on either coast because the demand side and the income side in the economy has been a little bit softer. There are always properties that raise your eyebrows with their values. The other thing I would point out is I suspect that many people who are in construction now will remain there. I think we’ve become a nation of remodelers and once people move into their homes they often tend to tinker with them and furnish them.
That’s one of the reasons why we remain reasonably upbeat about economic activity because of all the homes that we’ve sold. My guess is that furnishing them will have an echo effect that will last a number of quarters.
RAY SUAREZ: And rising interest rates don’t threaten that, Carl Tannenbaum?
CARL TANNENBAUM: Well, we’ve been waiting for interest rates to rise for quite a while. Alan Greenspan called it a conundrum that long-term rates remain as low as they are. But the ten-year treasury, which prices most fixed-rate mortgages, remains at 4 1/4, and adjustable rate loans are very affordable as well.
Competition amongst mortgagees is also keeping rates down for borrowers, so I think it would take quite an increase in rates to really stem the tide of the active home building that we see almost everywhere in the county.
RAY SUAREZ: Dawn McLaren, if we start to put together more quarters of this slower growth, does that inevitably mean, even in places that have been hot like your part of the country, that the job — new job rate growth will also slow in tandem?
DAWN McLAREN: Well, looking at it on a national perspective, yeah. We are seeing slower growth. But here in Arizona, especially, and in this region in the Southwest region, we’ve typically done very, very well. In New Mexico we’ve been able to avoid ups and downs because of the federal dollars, just like we were talking about on the east coast there. We have federal dollars in New Mexico that help to, help that boom and bust cycle. We have suffered here on occasion.
Back in 1991, back in the late 80s, there was another real estate crisis that we had here, and I’m sure we all remember that well. But I don’t think something like that is going to happen here. I think that interest rates, as has been mentioned, are not rising fast enough to make this into a panic situation. I think what has to happen here, though, is that our housing prices will come down to match the rates of growth and personal income. And our personal income has been growing at a fairly quick pace here. We also have a nice diverse economy here in Arizona versus Nevada, which is a little bit more one-sided. Their job growth has been in construction, but again as has been mentioned they also have that wonderful gambling income.
RAY SUAREZ: Anirban Basu, how much of a threat is inflation, both in your particular region and the way you see it for the wider economy?
ANIRBAN BASU: Oh, sure, it’s a major threat. I mean energy prices do sap the strength of our economy, here in the Mid Atlantic region. But remember we have some of the highest incomes in the country, Maryland and Virginia are two of the most affluent states in the country, and so these rising fuel prices for instance have less impact here.
And we also have less manufacturing as a region than most other regions of the country; we used to be the manufacturing center, one of them; we’re no longer that. And so again rising energy prices don’t affect our industrial base the way it once would have.
RAY SUAREZ: And Carl Tannenbaum, those same energy prices must have some ripples that run through the auto industry and the parts supplies?
CARL TANNENBAUM: Oh, absolutely. Both to operate the plants and operate the vehicles; it’s becoming more expensive to buy the energy required. Crude oil has been expensive for quite a while, but it’s only really been in the last six months that we’ve seen the dramatic impact let’s say on regular gasoline prices, one reason perhaps why some of the national readings on sales have been so tepid recently. But we remain a little more sanguine on the inflation picture.
A survey recently done for the National Association for Business Economics had an expectation of just a little over 2 percent for inflation this year. It’s a funny thing when something gets very expensive; people go out and look for more of it and find ways to use it more efficiently or use less of it. And in many ways, we’re beginning to see those trends develop that might take pressure off the price of energy later this year.
RAY SUAREZ: Carl Tannenbaum, guests, thanks a lot for being with us.
ANIRBAN BASU: Thank you.