Greetings,
Most of you know that I am not an economist. Most of you know that economists are people that didn’t have the personality to become CPA’s. U.W. faculty excluded.
While it’s frustrating trying to figure out which economist is right, I thought it might be insightful to share the thoughts of the Chief Economist for the Wisconsin Department of Revenue. Obviously, the projections from John Koskinen at D.O.R. will have an impact on the budget decisions that lie ahead. John was a presenter at last week’s Governor’s Conference on Economic Development. You can find his presentation on the WEDA web site at: http://www.weda.org/calendar/conferences/2009-gov-conf/ppt/koskinen-pfaff.ppt
As a non-economist, here is what I heard in the presentation:
-Decline in Gross Domestic Product (GDP), three to 5 months after the start of the recession is much worse than our previous two recessions. The Bureau of Economic Analysis is projecting slight growth in the GDP starting in the third quarter of 2009 (slide 11).
- The Federal Reserve Bank of Philadelphia Coincident Index (noted as FRB Phil coincident Index in the slides) combines four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). As you look at the maps on slides 5-10, you will see that Wisconsin has fared better than most of the Midwest states but the trend is certainly downward and rapid since June of 2008. If you look at the slides pertaining to Wisconsin (beginning slide 16), you will see that Wisconsin has been outperforming the other Great Lake States but not the national average.
-Retail sales and industrial production are in steep decline
- Wisconsin exports have been relatively strong.
- Home prices in Wisconsin have not appreciated as rapidly as the nation and will not likely decline as rapidly. Housing starts in Wisconsin are not projected to reach the 2005 levels until late 2011.
- Wisconsin housing starts have tanked, but the bottom is projected to occur in the third quarter of 2009.
-Despite all of the recent unemployment announcements, Wisconsin’s unemployment rates have been better then the nation. However our employment numbers in Wisconsin are back to 2000 levels (“the lost decade”). On the other hand, the other great lake states have employment levels lower than 2000-2001. Job losses in Wisconsin so far are not as bad as what we experienced in our last bad recession in the early 80’s. Janesville is the only metro area in Wisconsin with an employment rate above the national level (see slide 38). The Madison metro area has historically had some of the lowest unemployment rates during recessionary times and had an unemployment rate of 4.2% this month.
- When looking at employment numbers for December 2008 compared to December 2007, the only sectors to grow in employment at the state and national level were Education & Health and Government. In 2009, education is the only sector projected to grow in the U.S. while the hospitality industry in Wisconsin shows modest increases as well.
-Employment recovery is projected to be a little quicker in Wisconsin with a recovery beginning in mid 2010. Employment growth tends to follow economic growth as businesses are hesitant to add back employees and will likely be reliant on temporary staffing agencies in the interim.
-Wisconsin income is projected to outpace national income in 2010 as a result of a slightly quicker recovery in employment.
- Personal interest payments, and decreasing prices in consumer goods (gas!) has resulted in a rise in consumer spending power. However, as mentioned before retail sales are plummeting and savings are going up.
What's your take on these projections?
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You can watch or listen to a streaming version of this presentation on-line at the "Wisconsin Eye Television" web site. If you don't want to first listen to Rick Schlesinger, V.P. of business operations for the Milwaukee Brewers, skip ahead to the 1:01 (one hour one minute)point in the program. To watch, go to:
mms://71.87.25.133/evt/evt_090206_econ_dev.wmv
To listen, go to:
mms://71.87.25.133/evt/evt_090206_econ_dev.wma
Last November I did a 60 minute program titled, "Community Economic Development During a National Economic Downturn" for the Perspective Wisconsin show that is also available on Wisconsin Eye Television. To view this program, see:
mms://71.87.25.133/pwi/pwi_081105_econ_lewis.wmv
To listen:
mms://71.87.25.133/pwi/pwi_081105_econ_lewis.wma
Your view is right on Andy...I did not see John Koskinen's talk but did review the slides - very nicely done. I do think WI has not felt as much pain as neighboring states, but let's remember neighboring states like MI and OH and IN have had a very rough decade--in effect an almost 10 year jobs recession with the permanent loss of thousands of manufacturing jobs, plus per capita more foreclosures than even CA and FL. The prediction that housing starts pick up in 2009 maybe a stretch. It is possible, but credit markets and consumer sentiment would need a faster turnaround. Some economists have suggested the economy will rebound faster than other so we'll see.
Hi Andy,
Thanks for sharing the Economic Outlook article. I find the comments to be similar to my observations. Let me add one here before pasting below a message I did send to farmers who supply their data to me. I already shared it with the Ag All list
During the dot com days and the housing boom days, we in the middle of the country have often been looked upon by the coastal areas of the country as "not being with it" and at times some among us allowed that we were outdated etc. . Today it should be clear that we were probably a lot smarter than we or others thought and smarter than the economic leadership of the country. For example since we didn't lose sight of the connection between earnings and house prizes, house prices remained somewhat boring in Wisconsin--a condition that many around the country would like to have now. Also Wisconsin is more dependent on Agriculture than many states and that should be to our advantage in the next few years.
The State of the Agricultural Economy and Economy in General!
I expect the farm economy to weather the current economic crisis better than many other* *segments* in part because food is a necessity and in part because in the last two decades, the farm community in general acted like they learned the lessons of the farm crisis in the 1980s while the economic leadership in this country (private as well as
public) acted like they learned little from the lessons of both the farm crisis in the 1980s and the Great Depression.
Here is a quote (in italics) from Paul Krugman, the most recent recipient of the Nobel Prize in Economics discussing the causes of the current economic crisis. /This is, first and foremost, a crisis brought on by a runaway financial industry. And if we failed to rein in that industry, it wasn’t because Americans “collectively” refused to make hard choices; the American public had no idea what was going on, and the people who did know what was going on mostly thought deregulation was a great idea. Several other recipients of the Nobel Prize in Economics agree.
What I just referred to as the current economic crisis is the worst economic crisis SINCE the Great Depression. It will get worse before it gets better, but despite the ineffectiveness of the Wall Street bailout so far, we shouldn’t have to repeat the Great Depression.
In times like these, the ability to control costs and debt is valuable.
The tendency to focus on controlling costs, investment and debt should serve graziers well. *
If the 'economic leadership' (private as well as public) in this
country had used many of the same principles we have used analyzing the economics of grazing dairy cows in the WGDPA, the current economic crisis would be far less serious if it occurred at all.
I tend to “prepare for the worst and hope for the best.” In the WGDPA we did this by focusing on profits generated from operating the farm instead of relying on paper profits from gains in current market value (CMV) of assets. We tracked CMV but relied more on the cost or tax basis of assets for measuring performance. The cost or tax basis track usually shows smaller gains in net worth but these gains are solid unlike the “toxic assets” that too many large financial institutions have too many of.
One important part of the current national and international financial crisis was blind faith in the current market values (CMV)of houses and the belief that the CMV of houses would increase indefinitely. Much of this happened because large lenders (the smaller more local ones often showed much better judgement) allowed current market values of houses to have little or no connection to the ability of the purchasers to pay for their houses from current earnings. This was true for many kinds of borrowers including those who could have easily afforded modest homes but chose to purchase homes that turned out to be more expensive than they could afford. Being able to pay for the house from current earnings means that one can pay the monthly principal and interest payments based on reasonable loan terms from family income (usually current wages) and having enough family living funds left for not only the property taxes, insurance, repairs and utilities associated with owning a home, but also for food, clothing, etc. It also means that most if not all mortgage payments include at least some principal reduction. Interest only loans are simply not sustainable, especially if the payments represent the bare minimum the borrower can pay. If one’s dream home can’t be paid for without resorting to “creative financing”, then a less expensive option should have been considered instead of pursuing risky deals. I place much more blame on the lenders than on the borrowers because the lenders were supposed to be the informed professionals in loan transactions.
There are a number of similarities to the current economic crisis and the one which affected U.S. farmers so harshly in the 1980s. Leading up to that farm crisis, the CMV of many farm assets, especially land, was unrealistically high relative to the ability of these assets to generate farm income to pay for the assets.
Leading up to the 1980s, farm land prices increased mainly because farmers bid up the price peaking at an average of $1152/A in Wisconsin in 1981. Since 1990, farm land prices have exceeded prices in the late 1970s, at least in terms of face value (peaking at an average of $3247/A in Wisconsin in 2008). For much of this time period since 1990, non-farm demand for non-farm development was a major driver in increased land prices. In the last few years, farm land prices have increased more as a result of increased prices for corn and other grain in part due to ethanol production. The CMV of farm assets has remained stronger than the CMV of housing and some other non-farm assets. I think the CMV of farm assets will continue to hold stronger than the CMV of many non-farm assets.
However, I expect some weakening of the CMV of farm land and other farm assets as non farm demand for farm land declines and more ripples come from the overall economic problems. If your debt and your cost of production are reasonably low (as is the case with most people participating in the WGDPA), you can comfortably tolerate this decline in paper value.
For the last few years, the CMV of most farm land has been higher than one can justify from it’s net earnings from farming it. Fortunately only a small percent of farm land was purchased at today’s CMV. Also, the percent of debt among farmers is quite low and much lower than it is in many other sectors of the economy. This tells me the farm community remembered the lessons of the 1980s farm crisis better than the leadership of the largest financial institutions.
Still there is a small percent of farms that have a high percent of debt based on unrealistically high asset values. Anyone in that category should carefully examine their circumstances.
*Managers that try to optimize the relationship between income generation, operating expense and investment/debt and those that strive for operating profits will continue to be the most economically successful ones.
My contact information is on the letter head.
Sincerely,
Tom Kriegl
Farm Financial Analyst
University of Wisconsin Center For Dairy Profitability
Animal Sciences Building Rm 202
1675 Observatory Drive
University of Wisconsin
Madison, WI 53706-1284
Phone (608) 263-2685
Fax (608) 263-9412
NTERNET: tskriegl@wisc.edu
http://cdp.wisc.edu
Tom Kriegle's article titled, "Impact of Changing Milk and Input Prices on 2009 Wisconsin Dairy Profit Margins"
http://www.uwex.edu/ces/cty/fonddulac/ag/dairy.html
Wisconsin Agricultural Land Prices 2001-2008, A.J. Branstrom
http://cdp.wisc.edu/pdf/Wisconsin%20Ag%20Land%20Prices%202001-2008final.pdf
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