The Northeast Will See Consistent Slow Growth
Interview conducted by Rachel Duran
Editor’s Note: This interview was conducted on July 15, 2013, with Ken Goldstein, an economist with The Conference Board. For the latest economic news and the results of the
Global Corporate Xpansion: Ken, the stock market broke records one day last week (July 8-12). On Thursday of that week, the Dow Jones Industrial Average finished with a record closing, increasing by 1 percent; and the S&P 500 and the NASDAQ also finished with higher numbers. Then on Friday, the markets went flat. What does this say about the economy; and what does The Conference Board’s latest Leading Economic Index tell us?
Ken Goldstein: Let’s start with economy and move to the stock market because in some sense that is a story about the anticipated changes in policy rather than anticipated changes in the economy.
We have passed the fourth anniversary of the end of the Great Recession. It isn’t news that this has been a slow recovery both because the recession was so deep and because it involved a near freeze up of the financial markets.
The second reason is the consumer, which after all is two-thirds of the U.S. economy. Consumers, in general, have been busy for the last four years paying down more old debt than taking on new debt. The emphasis has been on building up savings and paying down debt, and delaying replacing old cars, furniture and appliances.
We have seen over the past year that consumers are replacing old cars, not so much that the consumers were convinced the economy was turning the corner but because the cars weren’t going to go much longer.
What has really changed for consumers is sustained growth in new jobs to almost 200,000 a month; and the question is, will we stay there? Most consumers, according to our Consumer Confidence Index, seem to be suggesting they are not expecting a fall back. They are not expecting that number to accelerate, but certainly not anticipating that we will go back to anemic job growth.
The second thing, and I have always cautioned about trying to read too much into one number from one month, but the increase in average hourly wages in June was an eye popping number. I do not think wages will continue to increase that strongly, but the gain in jobs and in wages, along with continued improvement in the housing markets across the country (we have regained $7 trillion in home equity), has put the consumer in a position to be less pessimistic.
It is not just the average consumer who sees this change coming in the economic environment; the Federal Reserve sees it as well.
GCX: Which contributed to the haywire markets?
Goldstein: The Federal Reserve has begun to talk about winding down its quantitative easing program, which is simply a process of the Federal Reserve buying bonds, and pumping liquidity into the economy.
What has happened in financial markets is a great overreaction to that initial Federal Reserve announcement that it may begin to wind down quantitative easing in the second half of this year.
That caused the stock market to nosedive. It is as if the markets overreacted and have corrected for that overreaction in some sense.
Where we go forward in the financial market is not real clear whether we will see another overreaction when the Fed finally does not just talk about winding down, but begins to wind down.
Meanwhile, we see this improvement coming in terms of the overall economy, assuming we will continue to see new growth in terms of jobs and improvement in the overall housing market.
Because the focus of these profiles for GCX is always regional, it is important to point out that the biggest change is concentrated in the South, and in the Pacific region, especially in the Northwest. Where you don’t see much change, and probably won’t see much change is in the Northeast corridor which extends from Washington, D.C., up to Maine.
This is a heavily service dominated economy, one that did not see as much of a drop off in the economy, in the labor market or in the housing market as we have seen in other parts of the country. Therefore, the recovery is not in evidence here as we see in other parts of the country.
GCX: Where does the Northeast fit into the national economic picture?
Goldstein: Let’s put some numbers against that. We are looking at job growth, specifically in services, and services other than health and education. In most of the country we are up to a 2 percent rate of growth, year on year.
In the Mid-Atlantic and the Northeast states, the Northeast Corridor, we are closer to 1.5 percent growth. So we are seeing growth, but the kind of consistent slow growth in this part of the country that we were getting six months ago, a year ago. And more importantly, the same consistent slow growth we will see six months from now, maybe a year from now.
GCX: Earlier this year we spoke of the budget sequestration. What are the effects of the sequestration on the Northeast’s economy? There is a large presence of government jobs in the Washington, D.C., area and Virginia.
Goldstein: And also the southern New England region. That has been a problem but more so in other parts of the country.
We talk about the U.S. economy but clearly one of the reasons to look at specific regions of the country is because the country doesn’t move at the same pace. Things are different in different parts of the country. Even in these large geographic regions, such as the Northeast Corridor. It is not a homogenous economy. We have a separate part in the southern corridor around D.C., which is dominated by those folks who are working for the federal government and are greatly impacted by the sequestration.
The sequestration will finish by October 1. It has been a headwind to date and the good news is it might turn into a tailwind and give the southern end of the Northeast Corridor a bit of a push later this year.
You can also see this in terms of the different changes taking place in the financial market. Not just with banking but also in the securities industry and the insurance industry. Indeed, the Northeast Corridor is the home of the financial market for the whole country.
And in that market what we have been looking at for a long time is consolidation, as well as a continued decline in the number of people working in finance, as well as in the incomes earned by people working in finance. This has a secondary impact in those industries, companies and regions that are dependent on the spending coming from those folks working in the financial industry, especially the upper echelons of the financial industry.
Even though it looks like the Northeast Corridor hasn’t seen much change, when you disaggregate in terms of subregions and industries, for example, these are important changes in terms of the public sector and the financial sector.
There is another important sector in this region, not only in terms of broadcasting but also in terms of publication. We have seen an increase in the Northeast Corridor for those people who are working in the information end of the online industry. But there is a continued decline in public broadcasting, book and magazine publishing, and in terms of advertising.
We have seen this continued churn in professional print journalism and new electronic journalism. The difference is on the electronic end, fewer people are working and they are making less money so that the changes in more traditional print journalism are a big change for this region. The numbers of people working in online media are not enough to offset the declines in jobs and salaries.
Ken Goldstein is an economist with The Conference Board, and can be reached by emailing firstname.lastname@example.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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