Nebraska’s economy recovering, but some concerns remain


January 24th, 2012

Lincoln, NE – Nebraska’s economy continues to recover from recession, but with some concerns on the horizon. Here is more perspective on the economy from three Nebraska economists.

Eric Thompson – University of Nebraska-Lincoln associate professor of economics; director of the Bureau of Business Research at UNL

How is Nebraska’s economy doing right now?

Eric Thompson is the director of the Bureau of Business Research at the University of Nebraska-Lincoln. (Photo courtesy UNL)

“Nebraska as an economy is exiting 2011 with tremendous momentum. Some recent evidence suggests that the U.S. economy might be gathering a bit of momentum as well. So with all the recent strength of the Nebraska economy, our unemployment rate’s been pushed down even a little further. We had very solid job growth in 2011. In some parts of Nebraska, now employment is above pre-recession levels. With that and a strengthening U.S. economy, I think it’s reasonable to be optimistic that 2012 will be a solid year again for the Nebraska economy.

“Now, I think there’s a few things that suggest caution, or that growth may moderate somewhat from recent levels. In particular, the value of the U.S. dollar has been rising quite a lot and Nebraska, being an important exporting state, could lose a little of its economic momentum due to slower growth in international trade. That also might be reflected in somewhat less buoyant commodity prices in 2012.

“So the fundamental reasons are there to be confident in the Nebraska economy going forward, both due to our own recent strength and the improving Nebraska economy, but I think there are some Nebraska-specific reasons to be cautious – if the farm sector cools off and export activity cools off modestly in 2012 again due to a strengthening U.S. dollar.

“And there still remains a sort of unusually high negative scenario for the U.S. and the Nebraska economy for 2012. By this stage of an economic recovery, after a recession, you’d hope to be extremely confident in another few years of solid growth. I am fairly confident that typical scenario will play out, but we have an unusually large risk that we could manage to fall into a second recession here. That’s primarily due to overseas concerns at this point. There’s still potential that the crisis in Europe could deepen further, and could deepen enough to not just cause a European recession, but a global recession.

“There’s some evidence of a slowing growth in Asia. If the Asian economies are not successful in reaccelerating and Europe has a very severe recession, there’s potential that the U.S. economy could be dragged down in that. So normally, we wouldn’t face a threat like that, and it does temper the optimism somewhat. It’ll probably be a few years before we can really feel completely comfortable and confident in our economic expansion.”

What are the areas and types of industry seeing growth right now?

“Because of the very strong farm economy, I think non-metropolitan Nebraska has recovered briskly from the recession. The Lincoln area actually is already above pre-recession employment. The greater Omaha metropolitan area has recovered and is doing quite well; people in big cities all around the country are jealous of Omaha in its success, but it probably hasn’t recovered quite as quickly as other parts of the state.

“What industries? Obviously, the strength in agriculture has been a big benefit to us. We’re now, and this is normal when you get to the recovery portion of a business cycle, seeing quite robust growth in businesses, such as the category called business services – which are really businesses which provide services to other businesses, rather than people and households – accounting, consulting services, printing, all sorts of things. That is now starting to rebound nicely.

“Retail employment is even picking up. Other types of services are growing fairly well. So it’s pretty broad-based, including manufacturing job growth in Nebraska over the last year.

“The only sectors that aren’t clearly in recovery? I believe government employment has been down or steady the last few years as state and local governments have tried to deal with budget problems. The other sector that’s been weak is construction. But the other important sectors in Nebraska’s economy appear to be growing. Transportation is one that I left out, but is another growing part of the economy.”

Has the recession created some broader changes in our workforce?

“Absolutely. I would call it a restructuring. I think that’s a term a number of economists would use where people and property and equipment exit certain industries and move into greater opportunities in other industries. In a capitalistic economy, that’s a big part of how the economy grows and the standard of living rises, sort of moving resources to more productive uses.

“Typically in a recession, that restructuring process is accelerated. Quite often, we’ll do a lot of the negative part of restructuring during a recession, and during the expansion we’re putting those resources back to use, and that’s really happened in a major way to the U.S. economy, and on a smaller scale, here in Nebraska.”

Ernie Goss – Creighton University professor of economics

Ernie Goss is a professor of economics at Creighton University. (Photo credit Institute for Supply Management-Central Iowa)

Is it unrealistic to expect farm income to stay as strong as it was last year?

“We will not see the growth in 2012 as we did in 2011. And the reason is just fairly simple. It sounds complex, but it’s simple. With Europe imploding as we speak, individual investors sell European bonds and convert those Euros into dollars. Now why are they doing that? They’re doing it to buy U.S. bonds. As ugly as our bonds are, our treasury bonds, they’re just a little bit prettier than the others. What that does is drive up the value of the dollar and push down agricultural commodity prices. So we’re going to see somewhat weaker agricultural commodity prices, at least in the first half of 2012.

“Secondly, you’ve got a global economy that’s slowing. In Asia, we’re not going to see the growth this year that we saw last year, so they’re not going to be pushing for purchase of our agricultural products.

“And finally, the ending of the blender’s tax credit for corn-based ethanol. That was about 45 cents a gallon. Now there’s a lot of ethanol production in Nebraska, so it is not going to certainly mean real negative numbers for the ethanol industry; it’s just going to mean they’re not going to be as positive. So all three of those will continue to mean support for the agricultural economy and support for the overall Nebraska economy; it just won’t be as strong in 2012 as 2011.”

What is the chance of slipping back into a recession?

“It’s been reduced significantly. I would say the chances of going back into a recession right now are 10 percent. What will really be the key is if there was an economic calamity in Europe, a disintegration of the eurozone – in terms of all of them dropping out and having 17 different currencies.It’d have to be a very significant collapse.

“Additionally, there is one other factor that could push us into a recession, and that would be oil prices back up to $140 to $150 a barrel.”

As a result of the recession, what are the sorts of job that may be going away, never to come back?

“Certainly any with what we call ‘economically redundant skills.’ That would be manufacturing jobs that were routine that can be repeated either with cheap labor in Mexico, China, wherever, and also can be done by machines. For example, even in a labor-intensive industry like meat packing, you are seeing some mechanization, and you’re going to see some reductions in the opportunities for the unskilled jobs. So it’s all changing.

“What the industry is crying for, and we’re not doing a very good job at, is producing individuals coming out of high school, college and community colleges who can meet those needs. Not only that, the demands of re-education are quite significant, and we’re not meeting those needs, either. It’ll continue to be a skills problem and an education problem.”

Bruce Johnson – University of Nebraska-Lincoln professor of agricultural economics

Bruce Johnson is a professor of agricultural economics at the University of Nebraska-Lincoln. (Photo courtesy UNL)

What will we see from Nebraska’s economy this year?

“As far as agriculture, I think a pretty good year in the making. Probably not even in the same ballpark as 2011 in terms of agricultural income conditions. However, there’s still a good project margin that crop producers can kind of work with at the beginning of the year here, as far as locking in some reasonable harvest time prices and a profit margin.

At the same time, the livestock producers are looking pretty good, too, which is a bit of an improvement over early last year. We’ve had some adjustments in the industry, particularly the cattle industry, and basically supply and demand dynamics are such that the retail price of beef is really at a kind of a record level, and also good, high prices for pork.

So it’s in part because of foreign demand and in part because of supply and demand adjustments, those producers are seeing some profit and being in the black early on in 2012.”

How great a concern are some of the problems in Asia, and especially Europe, right now?

“I think the issue of the European financial crisis is more significant than what we would give credit to. It’s a potential financial meltdown that could send currencies wildly crazy and it can spill over into this country, I think, in terms of the financial vulnerability that we have with banks which are internationally connected. There would be some who would suggest that even China’s rate of growth is not on a sustainable path because the rest of the world is in a precarious situation right now. I’d say all of these add up to the fact that we’re really into a headwind that we need to very seriously be watching and monitoring. Maybe we will muddle through it, but not without maybe some negative consequences.”

How significant could a more involved European collapse be in terms of export markets?

“I think that could be a pretty significant factor. One of the connecting points would be the value of the dollar. If the euro would default, that would lead to an uptake in the value of the dollar, and that means our exports would be more costly and the agricultural community would feel that straight on. There’s no question about it. Even a stronger dollar means that oil is priced more cheaply, and so even that comes back to suggest that ethanol, which is a key component of our Nebraska economy in the agricultural areas, would experience probably a lower price and therefore a lower commodity price for the ag producer.”

Talk about the evolution of a workforce after a recession.

“We never really see things go back to what they were before. Recovery is not getting back on track and doing the same thing, and probably more than ever in history, we have this whole employment and workforce condition that represents more structural issues than we probably give it credit. By structural, I mean that the skill level and the capability of the workforce don’t quite match the needs and the demand out there for skilled personnel. That can be in a lot of different areas, and so we’re dealing with workforce disparities. Quite frankly, there are parts of this part of the country where we probably are short on certain skilled positions. But we simply just don’t have people being upgraded in terms of the skill sets to fill those kinds of positions.”

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