Presentation to chamber examines why economic gains are not necessarily felt
BY Paul Groessel
Sun POST Newspapers
It seems there are no simple answers in economics.
“Are we heading into a recession?”
How much revenue did your business generate in 2013 compared to 2012?
What do you expect in 2014?
These are a few of the questions that economist Toby Madden asked during a North Hennepin Area Chamber of Commerce luncheon on May 21 at the Rush Creek Golf Club in Maple Grove. Madden is the regional economist in the public affairs department of the Federal Reserve Bank of Minneapolis.
There is not a simple answer, because the perception is all based on several factors, Madden said.
Madden – speaking from his own viewpoints and opinions, not that of the Federal Reserve – explained why the answer is not straightforward, and there may be no clear answer, only educated guesses.
Speaking purely from a cyclical standpoint, the United States is in an economic upswing, Madden said, which means at some point the country will be due for a recession. It is a matter of when and how bad, he said.
However, right now, that economic upswing is rather high, and it could grow in the next few years.
“We produced in the United States more economic output in 2013 than any country has ever produced in the history of the world,” Madden said.
That was based on the “total value of goods and services produced, adjusted for inflation – real (Gross Domestic Product),” Madden said. Based on GDP, which is calculated quarterly by the Bureau of Economic Analysis, 2012 was a record year as well, and it looks like 2014 will be a record year, too, Madden said.
“Most people do not realize we’re in an economic expansion,” he said.
People think of the economy not as outputs – goods and services produced – but as inputs, such as jobs, he said.
There has been record output for several years, but there has not been record input (jobs), he said.
“How does that happen?” he asked.
In short, productivity has increased, he said. The job rates are likely to increase, however, Madden said.
In Madden’s view, there are three reasons the economic expansion is not well known: geography, socioeconomics and the job sector.
Depending on someone’s position in one of those three realms, the output-evident economic upswing is understandably not so evident on the ground, according to Madden.
During the luncheon, he showed a map of the United States with percentage changes for states’ GDP in 2012. Minnesota produced $280 billion in goods and services, growing at 3.5 percent in 2012 compared to the country’s 2.5 percent increase that year.
“If you take a look at this map, it’s very diverse,” he said.
North Dakota had more than 13 percent GDP growth in 2012, thanks to the oil boom, he said. But at the end of 2012, there were 18 states still in an economic recovery, he said. Nevada, Michigan, Florida, Ohio, Illinois, Indiana were some of them.
The diverse job sector also had a range of activity, according to Madden.
“What led us into this economic expansion was not home building,” Madden said. “What led us into this economic expansion was manufacturing, was natural resources, was professional, technical and scientific.”
Home building is starting to grow now, which should help the economic expansion, he said, since more goods will probably be produced to fill those homes.
“So I would say there is not going to be a recession this year,” he said.
The professional, scientific and technical sector is the most exciting to Madden, he said. Technological advancements allow for quicker payback on investments, he said.
“There has been rapid technological change during this Great Recession,” he said. “… It’s very diverse of who the winners are and who the losers are – that the overall economy is expanding, but you’ve got some areas that all of a sudden have a lot less sales because someone else took them over.”
The nation’s $80 trillion of total household wealth – assets minus liabilities – is also mixed.
The bottom 25 percent of families in the country have -3 percent of the nation’s wealth, he said.
“They owe more in liabilities than they have in assets,” he said.
As for the rest of the country:
• The bottom 50 percent of U.S. households have 3 percent of the nation’s wealth.
• The bottom 75 percent have 13 percent of the nation’s wealth.
• The bottom 90 percent has 33 of the nation’s wealth.
• The bottom 99 percent has 66 percent of the nation’s wealth.
• The bottom 99.9 percent have 80 percent of the nation’s wealth.
“So, now you’re wondering, where do you stack up, right?” he asked.
Here are some numbers:
A family with $8,000 of wealth – assets minus liabilities – would put it in the top three-quarters of the nation, he said.
Having one million dollars of wealth falls in the top 10 percent of the nation, while a household with $7 million in wealth would be the top one percent. The top one-tenth of one percent has $27 million in wealth, he said.
Those numbers were based on the Survey of Consumer Finances that included 2009 information, he said, so it has probably changed since then.
“Unequallness in itself is not bad for society,” he said. “What’s bad for society – what is a societal failure not necessarily a market failure – is when society cannot educate its people enough where they can earn a living wage, where they can add that much more in value to society, when they can capture some of that value so that they can get enough food to eat, enough clothes to wear, enough housing to shelter themselves, transportation, et cetera.
“And that is a big failure of society right now, in that we’ve got a big percentage of our population that cannot earn enough in society to meet their basic living needs.”
Back to the question about the recession. Is the country headed toward one?
“Yes, we are. It does not look like it’s going to be this year based on our surveys and based on our statistical models. It appears that business leaders are very optimistic. You’re on a seven-year high in terms of optimism.”
Of course, not everyone may agree with his view, and over-optimism, which leads to over production and a possible downturn, he said.
“Shocks to the system,” like extreme weather changes, epidemics, wars, negative technology shocks and other extremes can also cause a recession, he said.
Based on statistical models, it looks like employment will grow by half a percentage point this year in Minnesota, he said.
One of the major duties at the Federal Reserve is to have full employment and low and stable prices, he said. If wages increase 2-3 percent and productivity increases 1-2 percent, there is not much inflation, he said.
Contact Paul Groessel at [email protected] or follow the Sun Post on Twitter @ECMSunPost