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U.S. Economy: Steady As You Go? 


The economic winds are blowing against the Northeast, not with it.

 Interview by Rachel Duran

Editor’s Note: To learn the most up-to-date data as to the state of the economy, visit The Conference Board at www.conference-board.org.

According to the July edition of the Leading Economic Index, reporting on June’s numbers, the U.S. economy declined 0.3 percent to 95.6 (2004 = 100), following a 0.4 percent increase in May. The Conference Board also released its Coincident Economic Index, which increased 0.2 percent in June to 104.5 (2004 = 100), following a 0.2 percent increase in May.

Ken Goldstein, an economist with The Conference Board, says the CEI basically reflects a steady but soft pace of overall economic activity. He says the LEI points to no strengthening over the next few months.

Goldstein comments on the economies of the United States, and the Northeast United States. He also discusses the low points and emerging highs, and why consumers and businesses continue to hold onto their money; each waiting for the other to make a move.

Global Corporate Xpansion: Highlight the findings of the Leading Economic Index, which was released today [July 19].

Ken Goldstein: Essentially, the good news is that the economy is not heading into a recession. The bad news is that it was a slow spring, and to date, it has been a slow summer. The economy could be at this same point through Halloween, and maybe even through Thanksgiving.

While this is true for the overall country, in the Northeast corridor there is less chance we will see more of a decline; however, there is less chance we will see any pick up, in general.

What is happening is that you have consumers who have been and who are being cautious. If anything, they are turning even more cautious. Then you have businesses sitting on funds because the economy is too slow to convince them that this is the time to commit those funds. And then we have austerity in the United States at the state and local levels, which is not getting better.

With consumers and businesses sitting around waiting for someone else to act, it is difficult to move this economy forward.

It does not help that Europe is in the mess it is in. It doesn’t help that China, India and Brazil are all cooling off. There are indicators that India and China might start to pick up a little bit. These countries are more dependent on us then we are on them, and that may be truer in the Northeast than in other parts of the U.S. economy.

GCX: What is the outlook for the Northeast economy? What are the bright spots, what are the weaknesses?

Goldstein: Clearly the finance industry is struggling, and not just in New York City but the entire metro area. Finance includes insurance, which is very important in Connecticut.

The slowness in the European zone hurts the Northeast’s shipping and transportation, and finance sectors. Combined with the overall slow U.S economy, the winds are blowing against the Northeast, not with it.

Where there is some pick up in the global economy, the West Coast of the United States benefits in terms of China and India; and not the East Coast, where northern trade crosses the Atlantic Ocean.

The largest problem with the U.S. economy is that the labor market is stuck, adding only 100,000 jobs a month. We have a workforce in excess of 130 million. So even if we were to add 125,000 new jobs per month — taking that number over 130 million — basically, the technical term is ‘a drop in the bucket.’

One of the things we know is that two out of every three new jobs are generated by small businesses. Better than 40 percent of small businesses are tied directly or indirectly to the real estate market.

There is a glimmer of hope in the housing market, more on the rental side than the homeowner side. We have lost 2 million homeowners as a result of the downturn in the housing market. We have increased the number of renters by 5 million, and in the process, have reduced vacancy rates for rental units.

When you look at cities such as Washington, D.C., Baltimore, Philadelphia, Boston and New York, you have more renters than you would find in the Kansas City or Oklahoma City marketplaces.

One of the things we know is that two out of every three new jobs are generated by small businesses. Better than 40 percent of small businesses are tied directly or indirectly to the real estate market. However, even if housing is indeed picking up, it will not drive the U.S. economy into robust growth. At best, the economy will be less slow.

Outside of home building there is nothing going on right now and it doesn’t look like there is anything on the horizon that will light a spark under this economy.

GCX: What will it take to make consumers and industry move and start spending?

Goldstein: There are two factors at work. You have the consumer who is paying down debt, and who is cautious about taking on new debt in a slow economy. Therefore consumption is underperforming.

Businesses response has been to sit back and make plans, and not be very aggressive on the plans. You could try to use monetary policy and have the Federal Reserve put more liquidity into the system.

The problem is in the way it works, where the Fed sends money to the banks, and hopes they will lend the funds out. But when you have consumers who are more interested in paying down debt and not paying on debt; and businesses who are sitting back and waiting — who is going to borrow all that liquidity?

On the fiscal side we are in the grips of political gridlock, which is very unlikely to break up after the election.

So part of what we are doing is waiting for housing to pick up on its own and for consumers to pay down debt to where they are comfortable and then start to move forward. This is part of the reason why more than three years after the official end of the recession that we are talking about a slow economy that has not changed much.

GCX: What thoughts do you want to leave businesses with in regard to the economy?

Goldstein: In some sense, this discussion reinforces their assumptions about what is going on. They are not seeing much new business coming over the phone or via their Internet Web sites.

Moreover, we have talked in the past about the nature of economic cycles; they have a beginning and an end — this is a very elongated end. Keep in mind, the economy is not just cyclical but also structural because there are fundamental changes taking place. The structure of the economy has changed dramatically since before the recession and it is still undergoing big changes.

Any business can handle cyclical change. For example, as we speak, there are announcements by financial firms on Wall Street in regard to how many people they are in the process of letting go.

One of the big questions is how long it will take the cycle to finish so we can get back to business as usual; or how much of this is structural and therefore we may not get back to business as usual.

Have things changed enough to where businesses and industries will need to make fundamental adaptations to the changes in the economy? This is most likely keeping executives up at night and causing them to hold more meetings to determine which way this is going. Not only to address the changes they need to make now, but to plan for what is coming in 2014 and 2015. It is adding to this cautionary nature and may not be the time to initiate an expansion.

Ken Goldstein is an economist with The Conference Board, and can be reached by e-mailing ken.goldstein@conference-board.org. The Conference Board is a global, independent business membership and research association working in the public interest. The board’s unique mission is to provide the world’s leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501(c)(3) tax-exempt status in the United States. Among its services, the organization publishes information and analysis, makes economics-based forecasts and assesses trends. To learn more, visit www.conference-board.org.


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