Thanksgiving!
I am writing this little epistle the day before Thanksgiving (you are probably reading it a few days after). It is a time when others pause to count their blessings, economists pause to contemplate the prospects for the upcoming Christmas shopping season (which should be a really good one, by the way), and all of us feast on a bounty of culinary delights. I am going to depart from that time-honored tradition of obsessing over the “Friday after” shopping numbers and offer a bit of Thanksgiving thinking (with an economist’s slant, of course).
The Pilgrims landed in 1620. Within a couple of decades, the Massachusetts settlers established Harvard University, thus placing an early and important priority on education. They also provided schools for their younger children from the very outset. In so doing, they laid the foundations for the magnificent complex of centers of learning that now dot the entire sweep of majestic purple mountains and fruited plains. A well-educated citizenry is vital to our quality of life, and education at all levels remains the key to our future growth and prosperity. It all started with the Pilgrims, and for that we can be thankful.
The early settlers, according to popular lore and legend, learned crop cultivation from the early Native Americans. They embraced this idea and spawned an aggressive industry that would dominate the land that would become the United States for more than three centuries. While we have now moved well beyond the days when rural America was preeminent in the economy, we are still the bread basket to the world. Moreover, our consistent quest to improve the quality and increase the quantity of our food production has lead to many scientific advances, including the forerunners of modern biotechnology. There is, in fact, an unbroken string of innovation dating from our origins to the miracles of modern agriculture, genetics, and even medicine. Once again, we can thank the Pilgrims.
With the early settlers to Plymouth also came the household industry that had long existed in Europe. These artisans and their trades were the precursors to the Industrial Revolution and the continuing cycle of innovation that has brought us to the Information Age at the dawn of a new Millennium. Many of the amazing things that now occur on a daily basis—the forces that have generated such impressive and unprecedented gains in productivity during recent times—are but logical extensions of the ingenuity of days gone by. Let’s thank the Pilgrims one more time.
We can even attribute the beginnings of globalization and the resulting contemporary engine of economic growth to these hearty souls. After all, they traversed an ocean under the worst of conditions to establish a new outpost. Within a few years, they had fostered vigorous channels of trade, both nearby and across the Atlantic. (I might also mention that they did so in a very peaceful fashion.) Another nod of thanks to the Pilgrims.
Indeed, it is clear that the seeds of much of what we enjoy and marvel at today were planted on the coast of Massachusetts almost 400 years ago. We have much to be thankful for during this holiday season—the highest level of global economic growth on record, millions of new jobs this year alone, the most productive society in the history of the world, and boundless prospects for the future. We should also, however, recognize that the cornucopia of economic delights with which we are granted does not extend to every one. There are major concerns that need to be addressed.
But enough about “the economics of Thanksgiving” or “the life and times of our economic forefathers.” I want to make a rare departure from all things economic to say how truly thankful I am for my wonderful family and the joy they bring to me at all times. I have never been more blessed than I am at this very moment. I hope these few days of respite, feasting, and football affords you an opportunity to also consider those closest to you and how they brighten your days. Happy Thanksgiving!!
posted @ 09:15 AM CST [link]
Friday, November 19, 2004
The Short-Term Outlook for Texas
The Texas economy continues to improve at a healthy pace, with good signs emerging all over the place. Employment growth has been steady across most industries (some 123,700 new workers over the past 12 months). Although high tech is still weaker than in years past, activity is increasing and orders are extremely robust. The housing market has been a solid contributor to our economic strength. Optimism is high in many sectors that the pace of hiring will pick up in the near future and that the current momentum will build into a lasting growth pattern.
My latest projections for the state economy call for expansion in output (real gross product) of 4.15% over the next five years. (These percentages are compound annual growth rates, meaning they reflect changes in the size of the base from which growth is calculated.) Population is expected to expand at a 1.80% yearly pace, while the number of jobs grows by 1.96%. Look for income to be up 3.65% per annum through 2009. A variety of factors are contributing to this projected growth, though there remain some causes for concern.
The energy segment is still an important component of business activity in the state. Diversification of the economy over more than 20 years, however, has enabled the state to become less dependent on oil and has, thus, greatly reduced the boost Texas receives from an upswing in oil prices. (In fact, Texas is now a net importer of oil.) Moreover, many key growth industries of the future suffer from high crude prices and the resulting drag on the national and global economies.
While energy price fluctuations do not have as great an overall impact as in the past, the energy sector is still a notable driver of the state’s economy. Some segments of the Texas economy (such as oil and gas extraction and related services) and specific geographic areas (such as the Permian Basin) clearly benefit from high crude oil prices. In addition, Texas is the nation’s leading producer of oil and gas with 20% of crude and 26% of natural gas production and realizes gains from the sale of these products to other states. Currently, the petrochemical and refining industries account for some 23% of Texas manufacturing output and about 3% of the state’s total output, while providing jobs for less than 1% of Texas workers.
Manufacturing continues to play an important role in the state’s economic growth, accounting for just under 10% of the total nonagricultural jobs. Approximately 95% of Texas’ merchandise exports are manufactured goods. Texas is the second largest state in the number of jobs in computer and electronic product manufacturing.
Almost all of the state’s manufacturing businesses employ less than 500 workers. The future success of these companies will depend in part upon their ability to adopt new technologies and techniques and the extent to which they institute effective business practices.
Foreign trade is another source of growth. Texas is the nation’s leader in the volume of exports with approximately $98.85 billion last year, some 14% of the US total. There are over 230 countries around the globe that import Texas products and services. Last year, business with Mexico accounted for nearly $41.6 billion and represented 42% of the total Texas trade.
The inter-related nature of the economies of Texas and Mexico is evident, and the flow of goods and people is vital to the ongoing economic health of families, corporations, cities, regions, and states. Interaction with our neighbor to the south is one of the primary drivers of economic growth in many areas of the state. Over the past 12 years, the volume of Texas exports to Mexico has almost tripled.
Key export goods include computers and electronic equipment, chemicals, nonelectrical machinery, transportation equipment, petroleum and coal products, electrical equipment, appliances and parts, fabricated metal products, processed foods, agricultural goods, and plastics and rubber products. Continual growth in exports bodes well for the state’s top exporting industries.
In conclusion, economic prosperity is expected for the Lone Star State through the forecast horizon, with key forces now in place designed to enable substantial expansion over the next several years.
posted @ 09:13 AM CST [link]
Friday, November 12, 2004
The Next Five Years
For the past three and a half years, America has been the world’s fastest growing major industrial economy. Although the pace of growth has varied, advancement has been steady. Gross domestic product has continually trended upward, due in part to strengthening productivity and increases in efficiency. In fact, from 2000 to 2003, the pace of US productivity growth was the fastest in more than a half century. What can we expect for the next five years? Healthy economic growth.
Specifically, the US economy is forecast to see expansion in real gross domestic product (GDP) over the next 5 years at a pace of 3.47% per year. In terms of job growth, US gains are anticipated to be 1.46% per annum. Of particular note is strong projected expansion in defense, semiconductors, food processing, and building products, as well as industrial and transportation equipment. While manufacturing is highly important to America’s economy, service-related activities continue to play the dominant role in terms of the number of jobs.
America’s payrolls have seen steady increases during the past year with approximately 2.1 million jobs created. The unemployment rate has dipped to its lowest level in three years, even while the available workforce has gradually expanded. In excess of 139 million Americans are working today, more than at any other time in our history. Small businesses, which create about 70% of new jobs and generate over half of the nation’s economic output, are well positioned to flourish in the future.
Productivity has grown in every quarter since the second quarter of 2001, including several very impressive performances. These gains are expected to continue and will enable economic growth while maintaining price stability. The gains stem primarily from greater incorporation of technology and enhanced efficiency.
Consumers account for about two-thirds of all economic activity. While consumer confidence has faltered to some degree lately because of worries over such factors as rising energy prices and the war in Iraq, a general spirit of optimism still prevails. Thus, consumer spending is expected to remain steady for the near future.
The Consumer Price Index has shown some signs of moderation in recent months. Much of the upward pressure over the past year has been rooted in surging energy prices, although price increases have remained low by historical standards. The Fed’s rapid response to the hint of inflation earlier this year has reduced inflation fears; inflation is projected to remain low through the forecast horizon. Currently, the energy market is in turmoil amid political tensions in the Middle East and civil unrest in other oil producing countries. Oil prices will likely slide gradually below the $40 per barrel range (as an average price) over the next couple of years, though unexpected circumstances or lingering uncertainty could cause them to remain at a high level. Even so, the high cost of crude is not anticipated to derail the nation’s ongoing recovery.
Long-term interest rates have exhibited a downward trend in recent months. At the same time, short-term rates are moving upward, largely in response to actions by the Federal Reserve (Fed). This divergence is a positive sign for the economy, indicating confidence in the Fed’s ability to control inflation. Nonetheless, a modest upward trend in rates is expected as the substantial borrowing from the public sector competes for funds with expanding private credit demand.
Although improvement in the US economy is good news for equity markets, uncertainties related to oil prices and other factors have led to volatility in recent months. As these uncertainties ease, the underlying expansion of US business activity is expected to lead to growing corporate profits and better stock market performance.
While the outlook for the nation’s economy is generally sound, innovation will be an important key to the continued expansion of our economy. Indeed, with the ongoing march of technological achievements, it is evident that new ways of doing things have the potential to benefit the entire world. As technological advances emerge from various locations around the globe, the US must constantly seek ways to harness innovative energies and scientific breakthroughs and translate them into channels for business investments and economic return. Meeting this challenge is critical for the nation’s economic growth and development.
posted @ 08:37 AM CST [link]
Friday, November 5, 2004
The Next Five Years
Income inequality is often cited as a measure of economic health and even social progress. During the recent Presidential campaign, much attention was focused on the argument that the rich are getting richer, the poor are becoming poorer, and the middle class is disappearing. For example, the fact that there was a slight decline in median income over the past several years was lamented in many speeches, articles, and other venues.
However, on an inflation-adjusted basis, median household income has grown from $33,338 per year in 1967 to $43,318 in 2003. While the 2003 level is down from the near $45,000 experienced in 1999 and 2000, the degree of movement is nothing to be alarmed about by historical standards. Fluctuations such as that experienced in the past three years are typical of the changes in median income seen during business cycle downturns. As the economy continues to gain momentum and the pace of job creation picks up, household incomes can be expected to rise as well.
As far as whether the rich are getting richer and the poor poorer, it is helpful to look at the demographic characteristics of each group. The poorest Americans (bottom 20% of households as measured by income) tend to be persons living alone. In fact, some 19% of them are men living alone, and 37% are females living alone. Only 19% are married-couple families. Almost 39% of these householders are over 65 years old, and approximately 24% are over 75. Moreover, only 12% of householders in this group worked at full-time jobs all of last year, and some 60% of households had no one earning an income at all.
For the low to middle ranges of income, these patterns begin to change, with a notably higher percentage of households comprised of married couples. Few are retirement age, and most include one full-time earner. Looking at the higher income groups, the household composition tends to be dominantly married couples. Ages are concentrated in the prime working years of the 30s, 40s, and 50s.
A majority of upper income households included two earners working full time last year. Almost 77% of the highest income households were two-income families. A significant number of the highest group (14%) actually had three people working full time, and 7% had four. This is in sharp contrast to the much smaller participation rates at lower income levels.
Looking at typical income levels for households at varying points in the life cycle (young, prime working life, and retired) reveals a pattern completely in sync with what would be expected. More people ages 15 to 24 fall into the lowest income group than any other income category. College students and those just entering the workforce would be included in this group. In addition, a number of individuals in this age range are still single. For the 30s, 40s, and 50s, the top income quintile represents the largest concentration of households. However, at age 65 and over, the highest concentration of persons fits within the lowest fifth. Given typical retirement patterns, this is certainly not surprising.
Although not directly reflected in income data, a discussion of relative household income levels would be incomplete without mention of productivity. It is economically rational and desirable to pay the more productive persons in a society higher wages in order to improve overall standards of living. For example, because physicians typically have high incomes, more people are encouraged to undergo the rigors of medical school and training. Any occupation in high demand will typically see rising wages, thus leading more individuals to enter that field.
The ambitions, training, skills, and other characteristics of individuals vary tremendously. Income levels also cannot reflect the differing goals and lifestyle choices made. Moreover, they are often a poor indicator of wealth, quality of life, and sustainability. While it is certainly not desirable to see increasing poverty, income differentials in and of themselves are not a social problem. They are a necessary mechanism of a properly functioning economy, part of the natural signaling system of the market. It is only when they are indicative of external impediments to success and upward mobility that they become a source of enormous concern. Variations resulting from free choice about education, level of effort, and career path are the essence of an open culture offering diverse opportunities.
The bottom line is that income levels are just one measure of the health of an economy. They only consider one component of household financial health, ignoring wealth and some types of in-kind benefits, for example. In addition, they cannot reflect individual variation in ambition, skill, or myriad other factors. The recent uproar over income inequality certainly has some legitimacy and validity, but, like so many other things in a brutal campaign season, it was more about politics than economics.
posted @ 08:36 AM CST [link]
Friday, November 15, 2004
The Next Five Years
For the past three and a half years, America has been the world’s fastest growing major industrial economy. Although the pace of growth has varied, advancement has been steady. Gross domestic product has continually trended upward, due in part to strengthening productivity and increases in efficiency. In fact, from 2000 to 2003, the pace of US productivity growth was the fastest in more than a half century. What can we expect for the next five years? Healthy economic growth.
Specifically, the US economy is forecast to see expansion in real gross domestic product (GDP) over the next 5 years at a pace of 3.47% per year. In terms of job growth, US gains are anticipated to be 1.46% per annum. Of particular note is strong projected expansion in defense, semiconductors, food processing, and building products, as well as industrial and transportation equipment. While manufacturing is highly important to America’s economy, service-related activities continue to play the dominant role in terms of the number of jobs.
America’s payrolls have seen steady increases during the past year with approximately 2.1 million jobs created. The unemployment rate has dipped to its lowest level in three years, even while the available workforce has gradually expanded. In excess of 139 million Americans are working today, more than at any other time in our history. Small businesses, which create about 70% of new jobs and generate over half of the nation’s economic output, are well positioned to flourish in the future.
Productivity has grown in every quarter since the second quarter of 2001, including several very impressive performances. These gains are expected to continue and will enable economic growth while maintaining price stability. The gains stem primarily from greater incorporation of technology and enhanced efficiency.
Consumers account for about two-thirds of all economic activity. While consumer confidence has faltered to some degree lately because of worries over such factors as rising energy prices and the war in Iraq, a general spirit of optimism still prevails. Thus, consumer spending is expected to remain steady for the near future.
The Consumer Price Index has shown some signs of moderation in recent months. Much of the upward pressure over the past year has been rooted in surging energy prices, although price increases have remained low by historical standards. The Fed’s rapid response to the hint of inflation earlier this year has reduced inflation fears; inflation is projected to remain low through the forecast horizon. Currently, the energy market is in turmoil amid political tensions in the Middle East and civil unrest in other oil producing countries. Oil prices will likely slide gradually below the $40 per barrel range (as an average price) over the next couple of years, though unexpected circumstances or lingering uncertainty could cause them to remain at a high level. Even so, the high cost of crude is not anticipated to derail the nation’s ongoing recovery.
Long-term interest rates have exhibited a downward trend in recent months. At the same time, short-term rates are moving upward, largely in response to actions by the Federal Reserve (Fed). This divergence is a positive sign for the economy, indicating confidence in the Fed’s ability to control inflation. Nonetheless, a modest upward trend in rates is expected as the substantial borrowing from the public sector competes for funds with expanding private credit demand.
Although improvement in the US economy is good news for equity markets, uncertainties related to oil prices and other factors have led to volatility in recent months. As these uncertainties ease, the underlying expansion of US business activity is expected to lead to growing corporate profits and better stock market performance.
While the outlook for the nation’s economy is generally sound, innovation will be an important key to the continued expansion of our economy. Indeed, with the ongoing march of technological achievements, it is evident that new ways of doing things have the potential to benefit the entire world. As technological advances emerge from various locations around the globe, the US must constantly seek ways to harness innovative energies and scientific breakthroughs and translate them into channels for business investments and economic return. Meeting this challenge is critical for the nation’s economic growth and development.
posted @ 08:32 AM CST [link]
Friday, November 5, 2004
Reasons for Income Inequality
Income inequality is often cited as a measure of economic health and even social progress. During the recent Presidential campaign, much attention was focused on the argument that the rich are getting richer, the poor are becoming poorer, and the middle class is disappearing. For example, the fact that there was a slight decline in median income over the past several years was lamented in many speeches, articles, and other venues.
However, on an inflation-adjusted basis, median household income has grown from $33,338 per year in 1967 to $43,318 in 2003. While the 2003 level is down from the near $45,000 experienced in 1999 and 2000, the degree of movement is nothing to be alarmed about by historical standards. Fluctuations such as that experienced in the past three years are typical of the changes in median income seen during business cycle downturns. As the economy continues to gain momentum and the pace of job creation picks up, household incomes can be expected to rise as well.
As far as whether the rich are getting richer and the poor poorer, it is helpful to look at the demographic characteristics of each group. The poorest Americans (bottom 20% of households as measured by income) tend to be persons living alone. In fact, some 19% of them are men living alone, and 37% are females living alone. Only 19% are married-couple families. Almost 39% of these householders are over 65 years old, and approximately 24% are over 75. Moreover, only 12% of householders in this group worked at full-time jobs all of last year, and some 60% of households had no one earning an income at all.
For the low to middle ranges of income, these patterns begin to change, with a notably higher percentage of households comprised of married couples. Few are retirement age, and most include one full-time earner. Looking at the higher income groups, the household composition tends to be dominantly married couples. Ages are concentrated in the prime working years of the 30s, 40s, and 50s.
A majority of upper income households included two earners working full time last year. Almost 77% of the highest income households were two-income families. A significant number of the highest group (14%) actually had three people working full time, and 7% had four. This is in sharp contrast to the much smaller participation rates at lower income levels.
Looking at typical income levels for households at varying points in the life cycle (young, prime working life, and retired) reveals a pattern completely in sync with what would be expected. More people ages 15 to 24 fall into the lowest income group than any other income category. College students and those just entering the workforce would be included in this group. In addition, a number of individuals in this age range are still single. For the 30s, 40s, and 50s, the top income quintile represents the largest concentration of households. However, at age 65 and over, the highest concentration of persons fits within the lowest fifth. Given typical retirement patterns, this is certainly not surprising.
Although not directly reflected in income data, a discussion of relative household income levels would be incomplete without mention of productivity. It is economically rational and desirable to pay the more productive persons in a society higher wages in order to improve overall standards of living. For example, because physicians typically have high incomes, more people are encouraged to undergo the rigors of medical school and training. Any occupation in high demand will typically see rising wages, thus leading more individuals to enter that field.
The ambitions, training, skills, and other characteristics of individuals vary tremendously. Income levels also cannot reflect the differing goals and lifestyle choices made. Moreover, they are often a poor indicator of wealth, quality of life, and sustainability. While it is certainly not desirable to see increasing poverty, income differentials in and of themselves are not a social problem. They are a necessary mechanism of a properly functioning economy, part of the natural signaling system of the market. It is only when they are indicative of external impediments to success and upward mobility that they become a source of enormous concern. Variations resulting from free choice about education, level of effort, and career path are the essence of an open culture offering diverse opportunities.
The bottom line is that income levels are just one measure of the health of an economy. They only consider one component of household financial health, ignoring wealth and some types of in-kind benefits, for example. In addition, they cannot reflect individual variation in ambition, skill, or myriad other factors. The recent uproar over income inequality certainly has some legitimacy and validity, but, like so many other things in a brutal campaign season, it was more about politics than economics.
posted @ 08:31 AM CST [link]