College of Business Administration

The Economic Outlook for Nebraska and the United StatesIs Growth Sustainable?

Presentation toThe Midlands Chapter of the Risk Management Association,

8th Annual Economic Outlook

September 25, 2014

Eric Thompson

Director, Bureau of Business Research

College of Business Administration

University of Nebraska-Lincoln

ethompson2@unl.edu

www.bbr.unl.edu

1

College of Business Administration

OutlineNational Economic Conditions and Outlook

The promise, the problems and the bottom line

The environment for interest rates

Nebraska Economic Outlook

The next 6 months

The next 2 ½ years

2

College of Business Administration

National Outlook – The Promise

• Real wage growth has returned• Geo-political factors may be waning (oil)• Progress on spending levels• The Federal Reserve is staying patient

3

College of Business Administration

National Outlook – The Problems

• The aging of the workforce• The rising dollar• Russia derails Europe• Failure to address 3 critical reforms

– tax reform– entitlement reform– immigration reform

4

College of Business Administration

National Outlook – The Bottom Line

• Strong growth the rest of 2014• Moderate growth in 2015 and 2016

– The three reforms won’t be addressed– A rising dollar– Gradual increase in interest rates

5

College of Business Administration

The Environment for Interest RatesRates to Stay Low: Example of 10-Year Treasury Bond

6

2014.2 2014.3 2014.4 2015.1 2015.2 2015.3 2015.4 2016.1 2016.20.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Interest Rate on 10-year Treasury Bonds

College of Business Administration

The Environment for Interest Rates

“There has been a change in the natural balance of between savings and investment, leading to a decline in normal real rate of interest.”

- Laurence Summers

Reasons for this:1) Reduction in demand for debt financed investment – large ventures (by market value) can be started at little cost

7

College of Business Administration

The Environment for Interest Rates

2) Declining population growth – older population which borrows less

3) Rising income inequality- greater concentration of income for top earners raises the propensity to save

4) Decline in the relative price of capital goods – less borrowing

8

College of Business Administration

The Environment for Interest Rates

5) Due to taxes, lower pre-tax interest rate in low inflation environment

6) Central banks building reserves, especially in safe dollars – willing to accept low interest rates.

I’ll add 7) – higher share of income growth in “saving” nations (china, etc.) – also raises the propensity to save

9

College of Business Administration

Economic Conditions in NebraskaNext 6 Months

The Nebraska economy is expected to be strong during the 2nd half of 2014 and at the beginning of 2015. This is according to two UNL monthly reports The Survey of Nebraska Business The Leading Economic Indictor – Nebraska

10

College of Business Administration

Economic Conditions in NebraskaSurvey of Nebraska Business from UNL Bureau of Business Research

A survey of 500 businesses each month

In most months, a 25% to 35% response rate

A random selection of businesses

11

College of Business Administration

Economic Conditions in NebraskaSurvey of Nebraska Business

12

Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14-2.50%

-1.25%

0.00%

1.25%

2.50%

0.45% 0.41% 0.26%0.64%

0.34% 0.31%

Business ExpectationsResults from Last 6 Months

College of Business Administration

Economic Conditions in NebraskaLeading Economic Indicator – Nebraska from the UNL Bureau of Business Research

Six components:Business expectationValue of U.S. dollarSingle-family home building permitsAirline passenger countsInitial claims for unemployment insuranceManufacturing hours

13

College of Business Administration

Economic Conditions in NebraskaLeading Economic Indicator - Nebraska

14

0.18%

1.21%

0.20%

1.74%

-0.79%

1.37%

-2.50%

-1.25%

0.00%

1.25%

2.50%

Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14

Figure 2: Change in LEI - N Last 6 Months

College of Business Administration

Economic Conditions in NebraskaLeading Economic Indicator - Nebraska

15

0.04%

0.31%

1.02%

0.29%0.47%

0.24%

104.00

105.00

106.00

107.00

108.00

109.00

Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15-1.25%

-0.75%

-0.25%

0.25%

0.75%

1.25%

Figure 7: 6-Month Forecast of Coincident Economic Indicator - Nebraska

Index Growth Index Value

College of Business Administration

Economic Conditions in NebraskaLonger-Run Forecast (Through 2016)

Moderate or strong job growth outlook in key industries yields moderate income and population growth in Nebraska in 2015 and 2016

Strong growth: construction and services

Moderate growth: retail, manufacturing, transportation

16

College of Business Administration

Economic Conditions in NebraskaLonger-Run Forecast for Construction (2% - 2.5%)

17

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

30

35

40

45

50

55

1000

s o

f Jo

bs

College of Business Administration

Economic Conditions in NebraskaLonger-Run Forecast for Services (1.5% - 1.8%)

18

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

280

300

320

340

360

380

400

420

1000

s o

f Jo

bs

College of Business Administration

Economic Conditions in NebraskaLonger-Run Forecast for Retail Trade (1% in 2014)

17

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

80

85

90

95

100

105

110

115

1000

s o

f Jo

bs

College of Business Administration

Economic Conditions in NebraskaLonger-Run Forecast for Transportation (0.5% - 1.5%)

18

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

40

42

44

46

48

50

52

54

56

58

1000

s o

f Jo

bs

College of Business Administration

Economic Conditions in NebraskaLonger-Run Forecast for Manufacturing (0.3% - 0.7%)

19

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

80

85

90

95

100

105

110

115

120

1000

s o

f Jo

bs

College of Business Administration

Economic Conditions in NebraskaLonger-Run Forecast for Agriculture

Nebraska agriculture should maintain most income and wealth gains

There will be growing international demand for imports from a growing global middle class

Nebraska is a highly competitive agriculture regionProduction cluster yields a cost advantage

Ogallala Aquifer yields reliable water supplyClimate change may act to concentrate agricultural activity in Nebraska

19

College of Business Administration

Economic Conditions in NebraskaLonger-run forecast for total non-farm jobs

20

2014 2015 20160.0%

0.5%

1.0%

1.5%

2.0%1.8%

1.5%1.4%

1.2%

1.0% 1.0%

United States Nebraska

College of Business Administration

Economic Conditions in NebraskaLonger-Run Forecast for income and population

Rate of Growth

Measure 2014 2015 2016

Non-Farm

Personal Income 3.9% 4.3% 4.4%

Farm Income -13.3% -3.1% -1.3%

Inflation 2.0% 2.4% 2.8%

Population 0.7% 0.6% 0.6%

21

College of Business Administration

THANK YOU

Any Questions?

22