Economists Read the Tea Leaves for 2012

Forecasts range from hugely optimistic to darkly pessimistic, but most agree: We’re seeing some indications of improvement in the business climate.

By Dennis Boone

The calendar flips, and a new year—a presidential election year, at that—is upon us. What’s the lay of the land for the regional economy in 2012? Well, that depends on whom you ask. Ingram’s queried several economists familiar with conditions around the two-state area to see what the tea leaves are telling them about the year ahead. Their answers are laced with hopeful indicators of improvement and suggests business owners and executives should still employ caution setting short- and mid-term strategies.

On the positive side, national employment figures continue to inch up, producing a decrease in the jobless rate. Assuming that trend holds, both Missouri and Kansas are well-positioned for recovery; each starts the year with unemployment numbers lower than national figures. An energy-sector recovery is already driving job growth, and more will follow as production drives prices back down. And of course, interest rates are as low as most of us will see in our lifetimes.

But there are issues, as well. The recent announcement that the Boeing Co. will phase out 2,100 jobs in Wichita, combined with losses in related industries, threatens to wipe out more than half the hard-earned job growth posted statewide in Kansas over the previous year. In Missouri, the General Assembly looks to a new fiscal year with a hole $500 million deep—or more—in its general fund budget, potentially threatening higher education and K-12 spending, health care and social services and infrastructure maintenance. And unsettling events overseas, of which we seem to have no shortage, still loom in Europe and throughout
the Middle East.

This much is certain: Come Dec. 31, we’ll be able to tell which member of this august assembly had his finger closest to the true economic pulse of the region.

Gordon-SellonGordon Sellon, Oklahoma City University
Forecast: Rapid clearing, then a petroleum downpour

A high-energy front is approaching Kansas and Missouri, and if it doesn’t arrive in 2012, it will before long. Gordon Sellon, a former economist for the Federal Reserve Bank in Kansas City and now on the faculty at Oklahoma City University, says portions of the heartland are already leading an energy-production charge destined to turn the United States into a net exporter of petroleum products.

 “At both the regional and national levels, energy is going to be tremendously important, and probably the biggest job generator, with all the new drilling from the Dakotas into Ohio, Pennsylvania and West Virginia.” Driving that, he says, are new technologies for recovering oil and natural gas, but particularly the latter.

“Horizontal drilling—it’s just stunning what this is going to do” to alter the nation’s energy calculus, Sellon said. And cheap energy, as the world has seen over and over, translates into roaring economies.

The short-term dichotomy, he acknowledges, is that higher energy prices have driven the exploration boom. “But the production is actually going to drive prices down” when those fuels come on-line, he said. “We’re already seeing that in natural gas; prices there are unbelievably low.”

Energy strikes already are spurring manufacturing rebounds in Rust Belt states like Ohio—in the former steeltown of Youngstown, the first steel plant in decades is now under construction. But will this change occur in time to elevate the economies of other states, particularly Missouri or Kansas?

“It’s already having an impact,” Sellon says. “Job creation is pretty unbelievable now in places where drilling is going on. The interesting thing is, drilling is going on in places that haven’t seen energy production in 50 to 60 years. That’s going to generate all kinds of jobs.” As soon as this year, Sellon says, “the U.S. may flip—it already has in some products—to being a net exporter of petroleum products for the rest of the world, instead of a net importer.”

Bottom line: “The overall economy is starting to get some traction, and this is just going to help. Already, in terms of exports and manufacturing, we’re seeing some real improvements in the last few months. This looks much more sustainable. This energy stuff is going to provide a basis that makes me confident that the improvement is going to continue.”

Tom-KruckemeyerTom Kruckemeyer, Missouri Budget Project
Forecast: Mixed cloudiness, rays of revenue possible

Tom Kruckemeyer’s good news/bad news scenario is grounded in the numbers: The good news is that Missouri’s unemployment rate has declined by 1.5 percentage points over the past year. “No one is happy at 8.2 percent unemployment,” he said, “but the situation is getting better” and he cites 12-month statewide job growth of 93,000 through November, up 3.4 percent.

But there is that nagging bad-news piece. For Kruckemeyer, chief economist for the Missouri Budget Project, it’s the state’s fiscal picture, which could be out-of-focus to the tune of $500 million for the coming 2013 budget year. “Starting next July, the last of the federal stimulus-bill money will be gone and the state will be facing some pretty tough situations,” he said. His biggest concern? “The leadership—the governor and the legislative leadership—seem uninterested in entertaining anything on the revenue side to close that gap.”

Kruckemeyer said Missouri could ease its spending challenges by focusing on two key tax opportunities. “We’re pushing now for states to collect sales tax on Internet sales, which are becoming a more prominent part of the Internet scene,” he said. “We need the revenue, and it’s unfair to the brick and mortar retailers” that have to collect that tax, he said.

“Another area of tax policy we think needs to be addressed is the cigarette tax in Missouri, easily the lowest in the nation.” Missouri, he said, could increase that substantially and still be well below the national average and tax levels in bordering states. The revenue could go into health care and education funding, he
said, two areas likely to suffer without added revenues, and could provide vital infrastructural improvements for coming years with better highways.

Still, the current climate presents some important opportunities for business owners, Kruckemeyer said: “Obviously, if you need to borrow, there’s never been a better time. It’s hard to imagine interest rates getting lower—well, really, they can’t go lower; they’re practically at zero now if adjusted for inflation,” he said.

Chris-CourtwrightChris Courtwright, Kansas Legislative Research Department
Forecast: Partial clearing, with one dark cloud ahead

The Kansas Legislative Research Department was still framing last-minute analyses for the Legislature’s 2012 session when the Boeing Co. dropped its bomb: It would eliminate 2,100 jobs in Wichita by moving aircraft production closer to the Everett, Wash., headquarters.

“Things have changed in the last 24 hours with this Boeing thing,” Chris Courtwright said, brandishing a refined sense for understatement. Boeing’s announcement covers just part of the picture, he said, citing the potential for “an ancillary impact on the mom and pop machine shops that sell widgets to Boeing, Beech and Cessna.” Those suppliers could see an additional 2,100 jobs wither. The impact will be felt not just in income tax collections, but sales taxes as consumers in the state’s largest city tighten belts in response.

Shortly before that gut-punch, Courtwright’s department had improved its forecast for the state heading into 2012. Other indicators—the oil and gas industry and agriculture, in particular—marked the economic growth of Kansas over the previous two years, Courtwright said. But forecasters still anticipated that the rate of growth would decelerate as spring approached, given spikes in energy prices, continuing upheaval in the Middle East and the European debt crisis. “We still anticipate modest growth in the national and state economies” for 2012,  he said, with state GDP of 4.3 percent for the year.

Bill-Greiner-of-Scout-AdvisersBill Greiner, Scout Investments
Forecast: A slow-moving front, with patches of policy fog

If the Kansas City region—and the nation—is to throw off economic doldrums now stretching into a fourth year, the winds from Washington will have to shift, says Bill Greiner, chief investment officer for Scout Investments, a subsidiary of UMB Bank.

“From what I can tell talking to individual business people in Kansas City and St. Louis, the biggest impediments right now radiate from decision-makers in Washington,” he said. “I’m not pointing to one body politic or another, but the lack of decision-making and frustration we all feel is almost palpable. A lot of business people are not willing to make long-term capital allocation decisions that probably need to be made.”

That isn’t to say some positives haven’t shown up, Greiner said.

From a low point in 2009, “I think that, in general, business has probably stabilized as far as growth is concerned,” he said. Economic indicators across the 10th Federal Reserve District suggest growth is there, if not spectacular. The economic bedrock of this region—agriculture—“is doing very, very well,” he said. “Farmland prices have accelerated over the past two to three years, and that’s starting to impact farm spending. That ripples throughout our entire economy.”

UMB’s economists, he said, anticipate GPD growth for 2012 largely unchanged from 2011. “But the overhang of high unemployment levels remains, just maybe not as intense,” he said. Unemployment may be down a bit, “but nowhere near what we usually see in a third year of economic expansion. Usually, the drop is pretty dramatic.”

If Washington wants to restore confidence, he said, it might start taking deficit reduction seriously: “I’m not saying to raise taxes or reduce spending, either way, but to find a way to address the issue.” That, and a dollop of regulatory restraint from the Environmental Protection Agency and the National Labor Relations Board would go a long way, he said.

Joseph-Haslag,-Univ.-of-MissouriJoseph Haslag, University of Missouri
Forecast: Partly cloudy, slight chance of growth opportunity
“There is reason for some optimism in the 2012 Missouri economic outlook,” Joseph Haslag declares. The key word in that sentence? “Some.”

“I am forecasting that Missouri’s economic growth will be greater in 2012 than it is in 2011. I am not expecting the growth-rate increase, however, to be very large,” he said. He cites recent gains in productivity growth reported by the Bureau of Labor Statistics, where non-farm business productivity was 2.3 percent higher compared with one year earlier for the most recent third quarter. And productivity growth, he said, was the most important indicator of economic growth.

One of his biggest concerns is that economic growth in Missouri has lagged behind the national growth rate now for a decade. And the uncertainties over the business costs of health care reform, financial-market reforms and other regulatory hammers being swung in Washington probably mean a continuation of that troubling trend, he said. On top of that, he cites policies of the Federal Reserve as inducements for bankers to earn interest on deposits there, rather than subject capital to risks inherent in lending.

His prescription for long-term growth in the state? Eliminate the corporate income tax. “In Missouri, such a change would reduce net general revenues by about $300 million,” he said. “If corporations are not paying taxes, there is no need to seek credits and TIFS,” which are distortions of efficient tax policy. “Instead of vying for tax handouts, a company’s focus would shift to product opportunities and other innovations that are at the heart of economic growth.”

As the regulatory morass clears and technological advances emerge, Haslag says, economic growth will return to more typical levels. “Until that time, the best strategy seems to be to focus on the product. In other words, do not forget why you are in business. In order to compete and obtain profits, products, not TIFs, matter.”

Ernie Goss, Creighton University
Forecast: Sunny on the farm, with a bubble developing
With its focus on bioscience growth, its broad-based and diverse economy and its urban population of 2.2 million, Kansas City sometimes doesn’t fully appreciate just how closely its own economic fortunes are aligned with those of the rural economy. Ernie Goss does. The Creighton University economist conducts quarterly surveys of banks in a 10-state region, and the results give him a deep understanding of business conditions in rural America.

The farm economy, he says, is cooking right along. His concern is rooted thousands of miles away. “One of the biggest threats is the European collapse of and a default on sovereign debt,” Goss says. “That would primarily be Greece and Italy.”

Likening it to the failure of Lehman Brothers in 2008, he said there was a risk that the dollar would soar in value, setting off a freefall in commodity prices. That would take care of a potential overheating in the farm economy. At the same time, his global view extends to the Straits of Hormuz and Iranian saber-rattling there. “An embargo or some conflict there could push up oil prices to $140 a barrel, which we saw a few years ago,” he said.

A drive through most any farming community will demonstrate that sales of new pickup trucks remain strong; high prices for their goods have served them well. And in parts of the Midwest, farm land prices have soared past $10,000 an acre, foretelling a different kind of real estate bubble. Farmers have used that income, in many cases, to lower their debt levels, and they’re not borrowing aggressively from banks.

The most immediate positive sign he sees is the recent passage of a trade agreement with South Korea, which will open up markets for farm products that have long been ogled from the Midwest. “That’s going to open up some really, really great opportunities for the sale of agricultural commodities,” Goss said.

Art-HallArt Hall, University of Kansas
Forecast: Dark clouds, and lots of them

The economies of Kansas City—actually, of both Kansas Cities—move in close correlation with the national economy, says Art Hall, director of the Center for Applied Economics in KU’s School of Business. And that means if we’re to see a regional economy unyoked from a potential double-dip recession, leaders in local government need to be moving now.

“Kansas City, Kansas, and Missouri should eliminate all business subsidies and use the funds to create a uniform, low-rate, investment-friendly set of tax policies,” Hall declares. “The current ‘economic development’ game of targeted incentives for the lucky few depresses sustainable growth more than most policymakers appreciate.”
That advice would take on a particular urgency should his expectations for 2012 prove prescient: “The national economy will continue to grow slowly,” Hall says, “and there is a strong possibility that the national economy will experience another recession.”

Anyone looking to Washington for a prescription to that had best be on notice, he warns, because “I see no actions taking place at the national level that will help improve chances for recovering in 2012. Virtually all of it is counterproductive from an economic policy perspective.” Then again, perhaps Washington has done enough: “Several ‘game-changing’ pieces of legislation have passed in the past few years—and the cumulative impact of it has created a high level of uncertainty from a business perspective,” he says. “The uncertainty will not be resolved in 2012.”

About the most positive development he anticipates short-term is a continuation of the brain drain from rural areas of the region. “The Kansas City metro area continues to draw population from other parts of Kansas and Missouri,” Hall said. “This general source of growth will continue, and has generally been reinforced by economic downturns.”

Given that overall framework, Art Hall’s advice for smart business owners looking ahead? “Stay liquid,” he suggests, “and assess business deals in the context of slow economic growth.”