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COVER
STORY - March
2001 by Adam Bruns Sidebar- According to Challenger, Gray & Christmas, the 133,713 jobs lost in the nation during December was the highest monthly total since the firm started keeping track eight years ago. Factory production dropped by 1.1 percent in December, the most precipitous fall since 1991. The country’s GDP slowed to a mere 1.4 percent annual rate in the fourth quarter of 2000, but the overall growth of five percent for the entire year was the best in 16 years, eclipsed only by a 7.3 percent rate of growth in 1984. In Kentucky, the Governor’s Office for Economic Analysis has projected a 2.1 decrease in manufacturing jobs in the coming year, a reversal of earlier projections that had called for a 2.3 percent increase. These and other numbers are having an adverse effect on collection of personal income and sales taxes, which make up 75 percent of the state’s revenue. But how will the state’s overall economy fare in the coming year? That was the subject of the annual economic roundtable conducted in February by the University of Kentucky Gatton College of Business and Economics. “Yogi Berra once said you can observe a lot just by watching,” said Dr. Donald D. Mullineaux, setting the tone for a series of presentations that did their best to hedge, as a further half-point drop in interest rates by the Federal Reserve loomed later that same day. “The most important chart is productivity,” he said. “It cycles, but you’ll notice in the 1990s the absence of negative values. From 1995 to the present, the rate has been in excess of 3 percent. Economists call this the productivity shock … this is a positive surprise. The rapid increase in energy prices is a negative surprise.” Mullineaux pointed out the value of such a productivity shock, including the fact that even though inflation has begun to accelerate, unit labor costs have not followed suit. “One of the fundamentals of economics is if people are more productive, they should make more money,” he said. “But wages are actually going down, and only in the most recent period are we seeing some acceleration in the rate of wages. Not every single individual worker is more productive, and the predominant gains are in the manufacturing sector. But there are also fewer people working in that sector. They move over to the service sector, where wages are lower and productivity is lower. That change in the mix has been holding down wages.” Mullineaux also brought attention to the increasing diversion between people who’ve graduated from college and those who haven’t. “People without that education are seeing their wages go down,” he stated. In response to a question from the audience, Mullineaux indicated the possible parallels between productivity now and during the Industrial Revolution, both periods identified with a surfeit of technological progress. He concluded by giving workers the credit for the productivity gains the country has experienced, bypassing such typical credit-takers as former President Clinton, Bill Gates, Ronald Reagan or the imperturbable Alan Greenspan. “The people who never get mentioned are you and me,” said Mullineaux, in explaining why he thinks the positive productivity trend isn’t going away just because of a little slowdown. “It’s the workers who are working harder and working smarter. It’s almost ironic that the individual everyday worker gets almost no credit for this outcome.”
“There will be higher growth in 2002 and 2003,” he said, indicating an employment growth rate of more than one percent from 2001 to 2003, though it might be a bit lower due to unfolding developments. “We don’t think the slowdown in the state economy will be of any long duration.” Berger said that while goods-producing industries will see a decline in growth that mirrors the rapid rise of service industry jobs, Kentucky ought to come out slightly better than the rest of the country as a whole, maintaining its relatively constant position in per capita income. In other words, “while employment will grow faster than the U.S. as a whole, our incomes will grow at about the same rate,” he said. As for the touted New Economy, Berger indicated that the relatively laggard state of skilled occupations and electronic business in Kentucky might be a cause for concern. “Our percentage in the New Economy has been falling, and I know the Governor has been paying attention to it,” said Berger. “I tend to be a little worried about this if we’re facing a downturn.” Surveys of businesses revealed that in 1998, 10 percent of Kentucky firms were selling online. That number has crept slowly upward to 15.1 percent in 2000, a slowdown that Berger doesn’t see waning. “Forty-three percent of those not selling online don’t plan on doing it, whereas it was 35 percent in 1999,” he said. “That may be of some concern.” That New Economy tardiness, combined with Kentucky’s heavy reliance on manufacturing, may be cause for worry. But Berger said that Kentucky might just be different when it comes to how its manufacturing gets done, pointing to Toyota as the prime example. And, he added, “the rest of our economy may do enough better to counteract the downturn in manufacturing.” To Brent Ambrose, the real estate market looks very good indeed, as rents and values have remained stable, and interest rates have come down. “And if you’re lucky enough to have put money into an REIT or real estate mutual fund, you’re smiling today,” he said. “They were up 25 percent last year.” Ambrose projected a mild slowdown in housing starts for 2001 in Kentucky, and indicated that the rise in housing affordability Kentuckians experienced throughout the 1990s was apparently vanishing, a decline he characterized as “rather remarkable.” “Throughout the 1980s there was a phenomenal bucket of money going into real estate,” he recounted. “By 1994-95, we were almost back down to that equilibrium level. The interesting thing I find is in 1999, there was a big run-up in construction capital.” Now heightened regulation of lending, among other factors, is helping to dampen those big swings, he said. In the commercial sector, Ambrose reported that vacancy rates were down, but indicated some real concern for the hotel industry. “The break even rate was 53 percent in 2000, down 11 percent from 1999,” he said, projecting that the hotel vacancy rate will rise to 9.5 percent, while retail vacancy would have a hard road as well, with a three percent climb in vacancies. As for subjects like the Lexington office market, Ambrose demonstrated how it depends on where and when you look. “We had students this past fall initiate a survey of the office market that showed that vacancy was about 12 percent downtown and 10 percent out in the suburbs,” he said. “I called up Isaac Commercial Properties, and they reported 13 percent for downtown and seven percent in suburbs – it depends on when you do the surveys.” He did note however that either downtown number was a good sign, trending downward from the alarming 20 percent figure in 1999.
“My friend Tim Haymaker (a Lexington developer) sent me a note and said, ‘The reason I’m not here today is the market is so soft, I’m out there working,’” said Furst, who later noted that the College was considering locating a new business school complex closer to downtown Lexington. Next on the podium was the University’s new chair in macroeconomics Chris Waller, one of six new chairs in the Gatton College (three more chairs are funded but not yet filled). Given the impending interest rate announcement, he was hesitant to make a definitive call, but did call attention to history. “What people tend to forget is that Lord Greenspan missed the boat a little bit in 1990-91,” he said to nods of affirmation in the crowd. “Some projections suggest GDP growth of 2.2 percent in the fourth quarter of 2000. New housing starts have increased, manufacturing had an uptick in December. We may not have a real recession here. The Fed may be overreacting.” But Waller pointed out that if the first six months of 2001 show poor results, the Fed might indeed take “strong steps,” including further drops in the interest rate. As for tax cuts proposed by President Bush, Waller said, “People have to think about them as being large enough and lasting enough that they change purchasing behavior on large ticket items. If you’re getting $100 a month from the tax cut, you can start thinking about buying things. We’ve tried some of those temporary tax cuts before – Jimmy Carter sent everybody a check for $75, thinking that would drag us out of it. Everybody had a nice weekend, but that was the end of it.” “President Bush’s attitude goes beyond the tax cut,” added Mullineaux. “Our economy is the envy of the world. Some of the reasons why are that our markets tend to be more open, more competitive and less regulated, and we have stronger property rights. That in and of itself causes the economy to perform at a high level. You can feel a high level of confidence about that under Bush. He thought the government had excess resources available, and when he noticed the economy was weakening, he added that as additional rationale for the tax cut. It’s hard to use fiscal policy to move around the economy. Greenspan is not in favor of a tax cut to stimulate the economy.” As for the continuing rise in energy prices, Waller pointed out that almost all recessions since World War II have been preceded by such hikes in energy costs. “This
is a problem for the Fed,” he said. “It’s
caught in the middle, with inflation going up and the
economy going down. It has to decide which evil to
attack, and hope the other one doesn’t get too
bad.” Adam
Bruns is associate editor of The Lane Report. |
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Copyright 1996-2001, by Kentucky Business Online. All rights reserved. Editorial
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Meanwhile, as College
Dean Richard Furst noted, the commercial sector’s
condition was affecting attendance at the roundtable.