Outlook 2012: Will the Real Economic Recovery Finally Stand Up?

1. Outlook 2012: Will the Real Economic Recovery Finally Stand Up? Mark Partridge October 18, 2011 Swank Chair in Rural-Urban Policy (Partridge.27@osu.edu) Department of Agricultural, Environmental & Development Economics Ohio State University Extension

2. Introduction • The title of my 2009 talk: The Great Crisis: Will Economic Recovery Look More Like the Crisis? • Even though I realized that we were entering recovery, my answer was Yes!, but I never thought Yes!!!!!!!!!! and then some… • So, a good question is when will have recovery and then what are our next challenges/issues. Policy & Oulook Program

3. Introduction—Continued I will first provide an overview of where we are in the U.S. and Ohio to provide the context of today’s outlook. Then I will discuss forecasts for the U.S. and try to put some context on that for Ohio and perhaps for the 2012 elections. I will then conclude with a little about the economic impacts of Marcellus Shale and then inequality for the US. Policy & Oulook Program

4. Economic Recovery: Then and Now • From WW II to 1990, recessions tended to be cyclical. • Orders slowed down. • Inventories fell and pent-up-demand took hold. • Factories rehired workers—i.e., most jobs did not disappear. Policy & Oulook Program

5. Economic Recovery: Then and Now • Since 1990—recessions have become structural as industries/firms downsize and the lost jobs permanently disappear. • “Jobless recoveries” • Bubbles in the 1980s and 1990s took years to work off after recession. • This recovery also looks like the financial crisis recessions pre-Great Depression. Policy & Oulook Program

6. National Non-farm Employment 60 months after the onset of recession, seasonally adjusted, Month 0 =100

7. Ohio’s performance in recession and recoveries Ohio usually falls deeper in recession than the nation as a whole. This time we actually fared about average (just a little below average). Ohio recoveries tend to be drawn out. Policy & Oulook Program

8. Ohio Non-farm Employment 60 months after the onset of recession, seasonally adjusted

9. Manufacturing and Recession Manufacturing’s share of the economy is falling meaning that it has a smaller impact on growth. This recession is actually slightly better for manufacturing than the 2001 recession and the jobless recovery. Policy & Oulook Program

10. Manufacturing Employment Shares

11. U.S. Manufacturing Employment

12. Ohio Manufacturing Employment

13. Growth in the “Three C’s” The Three C’s performance also illustrates that OH will likely recovery differently depending on what part of the state we are talking about. A key reason for the economic differences across the 3 C’s is their relative manufacturing intensity, though each have their own culture. Columbus is lagging the other 2 C’s. Cleveland continues to surprise. Policy & Oulook Program

14. Columbus Non-farm Employment

15. Cincinnati Non-farm Employment

16. Cleveland Non-farm Employment

17. U.S. Forecast • I use the NABE September Forecast. It reflects the average of 52 economists and does not have an agenda. • http://www.nabe.com/publib/macsum.html • NABE forecasts 1.7% GDP growth in 2011 and 2.3% in 2012 (about 1% lower than their May 2011 forecast.) • A reasonable economic expansion should have > 4% growth for 2 years or so. • IMF’s U.S. forecast is 1.5% and 1.8%. • Also revised down by about 1% since June. Policy & Oulook Program

18. US Forecast • NABE sees a very weak labor market • Monthly Nonfarm payrolls are expected to rise 124,100 per month in 2011 and 162,100 per month in 2012. • At sustained monthly rate of at least 200,000+ is needed for a few years. • UR rate will still be 8.5% at end of 2012 • US still 1 million jobs below 2000 level. • Most panelists don’t see labor market recovery to pre-recession levels until 2015 and some don’t see it until 2017. Policy & Oulook Program

19. U.S. Forecast • On the positive side, NABE sees • Expansionary monetary policy (?) • Growth in the rest of the world (?) • Business investment and pent-up consumer demand (?) • On the negative side: • Low consumer and business confidence • Uncertainty about future gov’t policies (?) • I add uncertainty whether ‘Washington’ can do anything of consequence. • Tepid housing market (2013 recovery?) Policy & Oulook Program

20. U.S. Forecast • Negative Factors continued: • Financial headwinds caused by tight credit conditions and balance sheet restructuring • High federal deficits and the European debt (Greek) crisis weigh on the world economy • In this economic environment, while I do not see a recession, I have a difficult time seeing how a President could be reelected in this climate. • 1968 and 2000 elections are exceptions where economy was not THE issue. Policy & Oulook Program

21. Ohio Context • Ohio has added 1.6% jobs in the last year • US added 1%. • Ohio Unemployment rate 9.1% in Aug 2011, 9.9% Aug 2010, and 8.6% in May 2011. • Columbus has lost about 0.6% jobs--local performance has been uneven. Policy & Oulook Program

22. Ohio Context • Ohio’s strengths are • (1) strong leadership direction • I am not saying good or bad direction. • Improved position on state taxes. • (2) State budget is mostly balanced on a structural basis. • State avoided tax increases by pushing them down to local gov’t. • Yet, there is little uncertainty that the state budget is sustainable if we have another recession. Policy & Oulook Program

23. Ohio Utica (Marcellus) Shale: Game Changer? • Commenting on shale energy development: “This will be the biggest thing in the state of Ohio since the plow…This is truly extraordinary.” Aubrey McClendon CEO of Chesapeake Energy of Oklahoma. • Quoted in the Columbus Dispatch “Realism on Renewable Energy.” September 22, 2011, Pp. B1-B2. Policy & Oulook Program

24. Utica Shale: Game Changer? • Economists point out that ‘projects’ and policies should be judged on their net benefits and costs, and NOT net job creation. • E.g., CO2 content of coal vs natural gas. • E.g., lower energy costs or energy security. • The best source of an industry’s actual economic impact is NOT the industry itself, studies paid for by the industry, or sympathetic politicians and newspapers. • This is not a surprise . • In serious research, we use peer review to weed out poor studies. We create counterfactuals. Policy & Oulook Program

25. Utica Shale: Game Changer? • A counterfactual is what would have happened if there was no shale industry. The difference between the number of jobs that did happen and the counterfactual is the actual jobs CREATED. • So-called ‘impact studies’ that estimate direct and indirect effects are over-estimates of new job creation and serious regional economists have not viewed them as anywhere near best practice for decades. NOT COUNTERFACTUALS! • At best, a well done impact study should tell you how many jobs are ‘supported’ by an industry, not how many jobs it ‘created.’ Policy & Oulook Program

26. Utica Shale: Game Changer? • #3 continued: • The “Penn State Impact Study” funded by the shale industry is a good example. It predicts 111,000 jobs in 2011 and 212,000 in 2020 using the IMPLAN software. • Such studies usually ignore displacement effects and do not compare development’s impact to the counterfactual. Also, it estimated 95% of shale industry purchases are in PA. • (Mexican Restaurant/IA studies/no price effects) • We do a difference in difference assessment of those with heavy mining vs similar counties w/o mining to get a better handle on the actual income and job creation. Policy & Oulook Program

29. Source: U.S. Dept. of Labor QCEW http://data.bls.gov/pdq/querytool.jsp?survey=en and U.S. Bureau of Labor Statistics CES, Total Nonfarm Employment by state, www.bls.gov. • Note: 21111-Oil and gas extraction 213111 - Drilling Oil and Gas Wells 213112 - Support Activities for Oil and Gas Operations 541360 - Geophysical Surveying and Mapping Services 238912 - Nonresidential Site Preparation Contractors 333132 - Oil and Gas Field Machinery and Equipment Manufacturing 333911 - Pump and Pumping Equipment Manufacturing for natural gas wells 486210 - Pipeline Transportation of Natural Gas 237120 - Oil and Gas Pipeline Construction

30. Policy & Oulook Program PA Counties considered in our simple difference in difference counterfactual

31. Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov

32. Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.go

33. Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov

34. Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov

35. Inequality, taxes and class warfare • Growing inequality is likely to be a major issue in future political discourse—eg Occupy Wall Street. • Greater inequality encourages growth, entrepreneurship, and innovation. Source: Partridge, 1997 AER; 2005 J. of Reg Sci.) • It is also associated with greater job growth and lower unemployment (Pre-2000 Europe vs U.S. comparisons) • Greater inequality comes at the expense of breakdown in social cohesion, lower educational attainment, worse health outcomes, etc. • The pro inequality incentive aspects would clearly breakdown if the benefits are not widely shared. (Welsch, 1999) • Some politicians say the wealthy should pay more taxes. “Buffet Rule” Other changes possible… Policy & Oulook Program

36. U.S. Income Growth by Household Percentile: 1973=100

37. Conclusions The economy continues to sputter. I don’t see ‘normal’ growth until 2013 and full recovery until 2015-16. In other words, 2012 will represent a continuation of the jobs recession. Ohio is on a better budget footing. Utica shale should be evaluated on costs vs. benefits, not on job creation. The spectacle of high inequality is real and could approach a tipping point. Policy & Oulook Program

38. Thank you Mark Partridge Swank Chair in Rural-Urban Policy Dept. Agricultural, Environmental & Development Economics The Ohio State University Google “Partridge Swank” and you will get my website (614) 688-4907 (partridge.27@osu.edu) Policy & Oulook Program

39. Individual County Graphs Follow Policy & Oulook Program

41. Greene-Perry Matched Employment Pair • Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov.

42. Fayette-Franklin Matched Employment Pair Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov.

43. Susquehanna-Carbon Matched Employment Pair Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov.

44. Tioga-Union Matched Employment Pair Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov

45. Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov

46. Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov

47. Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov

48. Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov

49. Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov

50. Source: U.S. Bureau of Economic Analysis, REIS Data, Downloaded Oct. 7, 2011. www.bea.gov