This article appeared in the February 2008 issue of Johnson City
Business, the monthly publication of the Johnson City/Jonesborough/Washington
County Chamber of Commerce.
The Tri-Cities Business
Outlook for 2008
F. Steb Hipple, Ph.D.
Professor of Economics
“It
was the best of times, it was the worst of
times.” As a literary line to start a
novel, these words are as well known as “It was a dark and stormy night.” These two phrases give us a precise
description of the current business situation in the nation and the region. We are enjoying the best of times, yet we are
preparing for a stormy night and the worst of times.
By
all of the standard measures of economic and business performance, business
conditions could not be better. At the
national level, output is expanding at the highest rate in the past three years. Inflation is subdued, unemployment is low,
and a record number of Americans have jobs.
In the region, employment growth has been setting records and major
construction projects dot the countryside in Northeast Tennessee and
Yet
– the mood in the nation and the region is very apprehensive. Both the Administration and the Federal
Reserve have forecast slower growth in 2008.
And no less an authority than Alan Greenspan is worried that a recession
will occur in the new year.
The
National Business Situation
After
some stumbles in 2006, the national economy has performed well during
2007. And we would routinely look
forward to this favorable momentum continuing into 2008. Let’s look at some of the major factors at
work in the
As
measured by real gross domestic product (GDP), production in the
The
problem is that the high growth in 2007 has been due to unique circumstances in
each quarter. In the second quarter, for
example, imports declined which is counted as positive growth. In the third quarter, there was a large jump
in exports which is counted as positive growth.
Imports are now increasing again and export growth has moderated.
Consumer
spending and investment spending are the two continuing sources of overall
growth in the national economy. Consumer
spending is still growing, but at a much reduced pace. Investment spending – primarily construction
– has been flat. The consensus forecast
for next year is that these conditions will continue. So no recession, but overall output will
expand only in the one to two percent range.
Consumer
spending is the main engine driving total economic activity – accounting for
two-thirds of overall demand for goods and services. For the past several years, consumers have
been the key force in the business expansion.
Confidence was high and the demand for consumer goods and services
increased by an average three percent each year. But now consumers are retrenching, and demand
has dropped into a slower growth track.
Consumer
spending depends upon consumer confidence.
When confidence is strong, consumers will spend even if it is done with
credit cards. When confidence is weak,
consumer spending will suffer even when jobs are plentiful and paychecks are
fat.
Consumer
confidence in 2007 was shaken by two events.
The first was the collapse of the sub-prime mortgage market and its
impact on housing prices. Housing prices
are declining, and single family dwellings are the major financial asset held
by most American families. Economists
call this the “wealth effect”. When
housing prices increase, consumers feel richer and spend accordingly. When housing prices decline, consumers feel
poorer and reduce their spending.
The
second event was higher gasoline prices.
Prices at the pump have been very unstable (a source of concern in
itself) but are definitely higher than in past years. And the expectation is that gasoline prices
will be higher in the future. Higher
energy prices will absorb consumer spending that could have gone for other
things, and higher energy prices will also reduce the amount of travel and
travel related spending.
And
now with increasing anxiety about business conditions in 2008, consumers can
begin to worry about job security as well.
With all these elements, many forecasters are looking for only a modest
increase in consumer spending next year.
Investment
spending is primarily construction spending on houses, factories, offices,
stores, and infrastructure. One of the
driving elements in the economic expansion over the past four years was the
incredible boom in new residential housing.
We know now that the last two years of the boom were actually a
“speculative bubble” financed by incredible laxity in the home mortgage
industry. The financial markets that
serviced the bubble -- the sub-prime borrowers – have simply disappeared.
We
are now seeing the “contagion effects” of the sub-prime meltdown. All the mortgage markets have been affected,
and many financial firms that participated in the bubble are threatened with
bankruptcy. So do not look for any
recovery in residential construction or investment spending to boost the
overall economy in 2008.
However,
there is another element in the outlook for 2008. The value of the U.S. dollar is declining and
this might be the critical factor in avoiding a recession. For years, manufacturing jobs have been
declining in the
The
overvalued dollar has made import goods cheaper and exports more
expensive. So we import more, export
less, and suffer a massive trade deficit.
But the story goes on. Most of
the goods we import and export are manufactured goods. And as the overvalued dollar limits exports
and subsidizes imports, we are eliminating the jobs of American workers.
The
good news is that the value of the dollar is declining to a more realistic
level. And we can expect thousands of
manufacturing jobs to be saved and thousands more to be created. So for a change, the manufacturing sector
could be a positive element in the business outlook.
The
Tri-Cities Regional Business Situation
The
Tri-Cities area has benefitted from the general prosperity in the nation, but
also has enjoyed some advantages unique to the area.
For
the past two years, the region has enjoyed record setting business
conditions. We do not have statistics on
local output or incomes, but we do have information on jobs. And people are working, and the job gains are
in the thousands. This means that
production and family incomes are up accordingly.
Most
employment gains in the Tri-Cities region have been in services industries such
as finance, education, healthcare, leisure,
hospitality, and trade. Surprisingly,
construction employment has also been a major source of new jobs. But, and no surprise, regional manufacturing
employment has continued to decline in line with national patterns.
The
good news is that the job gains in services are substantial and that employment
levels have reached a higher plateau of output and income levels. Even if the economy softens in 2008, most of
these job gains will be preserved.
Further,
the growth in construction jobs has been in non-residential construction –
factories, offices, stores, infrastructure – so the region has avoided the
residential construction collapse and falling home prices that are afflicting many
urban centers in the country. In 2008,
we would expect the number of construction jobs to decline as major projects
are completed. But new non-residential
projects are being announced, so construction activity should continue at a
high level.
There
is good news in the manufacturing outlook.
For years, manufacturing jobs have been declining in the Tri-Cities –
but even with these losses -- manufacturing employment is still very important
to the local economy. The good news is
that as the value of the dollar declines to a more realistic level, we can
expect to see some job growth in manufacturing.
So for a change, being a manufacturing center is a positive element in
our local business outlook.
The
Outlook for 2008
The
business outlook for the region is more optimistic than for the nation. The
The
Tri-Cities region has a number of favorable factors in play for next year. Construction employment is centered in
non-residential projects, and these will continue at a high level. Recent
employment gains in services are solid, and a better value for the dollar could
trigger a rebound in manufacturing employment.
It looks like we will do better than the nation as a whole.