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Eric Thompson Director, Bureau of Business Research College of Business Administration

The Economic Outlook for Nebraska and the United States Is Growth Sustainable? Presentation to The Midlands Chapter of the Risk Management Association, 8 th Annual Economic Outlook September 25, 2014. Eric Thompson Director, Bureau of Business Research College of Business Administration

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Eric Thompson Director, Bureau of Business Research College of Business Administration

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  1. The Economic Outlook for Nebraska and the United StatesIs Growth Sustainable?Presentation toThe Midlands Chapter of the Risk Management Association, 8th Annual Economic OutlookSeptember 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

  2. Outline National 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

  3. 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

  4. 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

  5. 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

  6. The Environment for Interest RatesRates to Stay Low: Example of 10-Year Treasury Bond 6

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. Economic Conditions in NebraskaSurvey of Nebraska Business 12

  13. Economic Conditions in NebraskaLeading Economic Indicator – Nebraska from the UNL Bureau of Business Research Six components: Business expectation Value of U.S. dollar Single-family home building permits Airline passenger counts Initial claims for unemployment insurance Manufacturing hours 13

  14. Economic Conditions in NebraskaLeading Economic Indicator - Nebraska 14

  15. Economic Conditions in NebraskaLeading Economic Indicator - Nebraska 15

  16. 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: constructionand services Moderate growth: retail, manufacturing, transportation 16

  17. Economic Conditions in NebraskaLonger-Run Forecast for Construction (2% - 2.5%) 17

  18. Economic Conditions in NebraskaLonger-Run Forecast for Services (1.5% - 1.8%) 18

  19. Economic Conditions in NebraskaLonger-Run Forecast for Retail Trade (1% in 2014) 17

  20. Economic Conditions in NebraskaLonger-Run Forecast for Transportation (0.5% - 1.5%) 18

  21. Economic Conditions in NebraskaLonger-Run Forecast for Manufacturing (0.3% - 0.7%) 19

  22. 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 region Production cluster yields a cost advantage Ogallala Aquifer yields reliable water supply Climate change may act to concentrate agricultural activity in Nebraska 19

  23. Economic Conditions in NebraskaLonger-run forecast for total non-farm jobs 20

  24. 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

  25. THANK YOU Any Questions? 22

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