Is the U. S.’s Economic Health Here to Stay?
Interview conducted by Rachel Duran
Even though there have been great fundamental and structural changes to the U.S. economy since the end of the Great Recession five years ago, the Pacific Northwest and the West continue to lead the nation as its fastest growing economic regions. These regions held these honors before the Great Recession set in in the late 2000s.
The foundation of these economic strengths include friendly tax policies, the constant creation of high-tech startups, a highly skilled talent base, and lively international trade, both across the Pacific and down to Latin American markets.
Read on to learn why the nation’s economy is coming back, and why the Western states are poised to make huge strides as a result of the turnaround.
Rachel Duran: When we last spoke, the nation’s economic outlook was on a positive track. Where are we at this point?
Ken Goldstein: The economy is ready to motor down the road at cruising speed. The improvements in terms of job growth and therefore in terms of consumer confidence are enough, we think, to drive consumers to start spending money. We have talked about this before. They are ready to spend on long delayed replacement plans. We have seen this with the increase in the sales of automobiles for a year-and-a-half. It has been much less in regard to furniture and appliances.
If consumers are convinced that strong job growth will continue, and by strong we mean the creation of 190,000 jobs to 200,000 or more jobs per month, it will not only bring the unemployment rate down but possibly put upward pressure on wages.
On the other side of the coin, when this happens, business will put long delayed investment plans into play. This combination of activities, absent some of the roadblocks we have seen at the federal level, for instance, will finally drive the economy above its long-term potential. Possibly to as high as 3 percent, and possibly as early as this quarter, and continuing for some time into the first half of 2015.
At a point when consumers finish with replacement plans and businesses relieve pent up demand, the economy will resume cruising speed. This is not only the Conference Board’s opinion but also the Federal Reserve, the executive office’s Office of Management and Budget, and the Congressional Budget Office.
We all know the economy grows for one of two reasons: more people are working, demographics; or they work more efficiently, productivity.
The demographic end is the easy part. We are probably looking at a working age population growth increasing at a rate of 0.7 percent per year. That is down from where it was five years ago, and certainly down from a decade earlier.
And on the productivity end, depending on the source, it could be in the 1.5 percent to 2 percent range. This means full out growth for the U.S. economy is probably in the 2 percent to 2.5 percent range.
The path, nationally, is to move above that briefly for two or three quarters and move down by the middle of next year and stay there for some time. Again this is absent some new development somewhere.
Duran: Let’s move from discussing the U.S. economy to highlighting the U.S. West Coast’s economic outlook.
Goldstein: When you break apart the economy into regions, before the Great Recession, the West and the Pacific Northwest were the two fastest growing regions in the U.S. economy.
With all the changes, and there have been some strong fundamental and structural changes in the U.S. economy, that piece hasn’t changed. Those regions are still two of the strongest pieces of U.S. economy. The Pacific Northwest is one of the stronger economies in terms of the labor market, the housing market, and in terms of overall economic potential is clearly growing faster than the rest of the U.S. economy.
That is likely to continue for at least the next half decade or more.
Duran: Highlight some of the reasons the region will maintain this growth.
Goldstein: The region has a high level of development and skill levels in the workforce. It is a dynamic economy. There are many new startups in high tech, and there is a lot of trade.
The drivers of growth are available. Some people would throw in the overall public policy in terms of tax rates and planning and the lack of interference from government regulations. I am not sold on the argument but certainly the combination of where they are, what they have been through, what they are starting to do, what they are expanding into, taking advantage of not just overall trade but cross-Pacific trade.
One thing this region can take advantage of, and it is surprising California is not, is the fact that the Asia Pacific region has been the fastest growing piece of the global economy. Cross-Pacific trade has been an important piece in the Pacific Northwest’s trade sector.
Another important piece is not just what the region is trading across the Pacific, but what the region is trading down the Pacific, doing a lot of trade with Latin America. And the surprise is that the trade is going up the coast to the Pacific Northwest, as opposed to going to the ports of California and then traveling to and then through the Pacific Northwest.
The Pacific Northwest also has a reputation as a rather pleasant place to live in. It is not as hot and humid as other parts of the country. It doesn’t get as cold in Seattle as it does in Chicago, Detroit or Minneapolis.
And what we may see out of California and the Pacific Northwest is more growth than is true for the nation as a whole.
Duran: Highlight how areas such as Wyoming and Montana are performing.
Goldstein: It does not take much to get a high growth rate in states such as Idaho, Montana or Wyoming because they are so sparsely populated.
Certainly the energy boom has greatly benefited places such as Wyoming, and to a lesser extent Utah, Idaho, Colorado and Montana. Eastern Montana is proximate to the shale oil fields in North Dakota. Energy is very important in the upper mountain states.
What has turned from a benefit to a drawback is the state of affairs in non-energy commodities. Global demand and commodity prices, especially metals and others that are mined in both the northern and southern mountain states, have slowed down. The global economy has slowed down to a 3 percent rate of growth, and will not move much above that this year or in 2015, which has held down the commodity pricing.
One of the perennial problems in the mountain states, and the West in general, is the battle over water and the drought that has plagued the southern mountain states and certainly California. It is a multiyear drought, which exacerbates the age old struggle over water use.
Now let’s look at California as a whole. Northern and Southern California are very different. The northern region has some of the high tech that the Pacific Northwest has and that is one of the reasons they have been and are doing better than Southern California.
Southern California outgrowth (those who have left) has benefited places such as Colorado, Arizona and New Mexico. But overall, when looking at housing and commercial and office vacancy rates, things are turning around. It is just that they might not be growing as fast as the Pacific Northwest or Northern California.
And what we may see out of California and the Pacific Northwest is more growth than is true for the nation as a whole. And that differentiates them from the mountain states or the northern or southern states, which are likely to grow by a little, but not a lot.
Overall the picture out west is a positive one, which will see good or better than average growth. It won’t be uniform across the board, but places such as Los Angeles, San Diego and San Bernardino County will see decent growth.
If the drought breaks, some of the agricultural areas, places such as the Imperial Valley, may come back. And with the changeover in the Pacific from the El Niño climate phenomena to the La Niña climate phenomena, temperatures in the water in the Pacific region and the impact that has on the Humboldt Current, might be the spark to bring some rain to the Imperial Valley and other agricultural areas of California.
Duran: Takeaways from this discussion?
Goldstein: The housing markets in places like Arizona, Las Vegas and in some places in Southern California could turn what is a better than good story into a still better story. How much and how soon is the question. I am not willing to guess at that except to say the probabilities here are good that instead of seeing roadblocks thrown up in their way, they may see headwinds turn into tailwinds.
Ken Goldstein is an economist with The Conference Board, and can be reached by emailing email@example.com. 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.
Illustration by renjith krishnan at Free Digital Photos.net