Restrained recovery

By wmadministrator

Kentucky’s economic expectations, like the nation, are for a restrained recovery in 2010.

Kentucky is a low-growth state that, like the Midwest, has an aging workforce, less population and lacks concentrations of industry that generate lots of jobs.
Expect GDP growth of about 3 percent for 2010. That’s meager for an economy coming out of deep recession, however. Most businesses will see profits grow, but won’t be putting many unemployed people back to work. We will still be looking at 9.5 percent unemployment a year from now.

Kentucky is above the national average for unemployment because it is more dependent on manufacturing than the average state. However, it is possible Kentucky could see an early boost because of manufacturing, which is seeing some improvement because of inventory rebuilding. U.S. exports are rebounding and manufacturing is key.

Looking down the road, to have a more sustainable economy we need to focus more on exports and manufacturing. Over the years manufacturing has lost jobs and competitiveness. This happened in part because of the value of the dollar, which was high compared to other currency, especially China’s. If the dollar declines, manufacturing will come back. Overall, however, growth in the rest of the world is more important for U.S. exports than the exchange rate. We can’t expect much growth from Europe, but China, India and Brazil do have potential. That’s going to be a great benefit to the United States.

Kentucky’s GDP growth rate will probably be lower than that of the United States because of underlying demographic factors already mentioned. We just have to recognize that and base our expectations on that. We have an oversupply of housing and strip malls. There is potential for redevelopment, however, because people are now thinking more about energy costs and it is more appealing to live near central areas.

Areas with concentrations of healthcare and higher education have fared best during the recession. There should be a renewed push to invest in education. Higher education, especially, is providing the foundation for future growth.
The U.S. auto fleet was overbuilt beyond population and income growth also. Sales fell from 16 million on an annual basis to less than 10 million. We can probably expect it to bounce back about halfway. Home construction will likely see only a very mild return.

Tying this together is the financial situation. People were able to get into houses and autos because of the availability of credit, which has changed fundamentally. The world today is not going to be like the pre-recession world in terms of credit availability.

The current budget deficit and debt level is very high, but it is affordable. It is possible to get this under control, but the bigger debt becomes, the longer it takes to get it under control.

Business investment is much too small compared to consumer spending, government spending or the housing sector to replace them as a mainstay of the economy. A private-sector-based economy is really our only hope for high rates of growth in the future. We must find markets overseas for U.S. products.

We have floated from one bubble to the next for 10 years or so. Consumer spending is not a basis for strong, long-term growth. We must build human capital, which will in turn generate jobs and financial capital growth. A reorientation is needed.

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