1. 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 University of Nebraska-Lincoln ethompson2@unl.edu www.bbr.unl.edu 1

2. College of Business Administration 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. College of Business Administration 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. College of Business Administration 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. College of Business Administration 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. College of Business Administration The Environment for Interest Rates Rates to Stay Low: Example of 10-Year Treasury Bond 6

7. College of Business Administration 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. College of Business Administration 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. College of Business Administration 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. College of Business Administration Economic Conditions in Nebraska Next 6 Months The Nebraska economy is expected to be strong during the 2 nd 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. College of Business Administration Economic Conditions in Nebraska Survey 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. College of Business Administration Economic Conditions in Nebraska Survey of Nebraska Business 12

13. College of Business Administration Economic Conditions in Nebraska Leading 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. College of Business Administration Economic Conditions in Nebraska Leading Economic Indicator - Nebraska 14

15. College of Business Administration Economic Conditions in Nebraska Leading Economic Indicator - Nebraska 15

16. College of Business Administration Economic Conditions in Nebraska Longer-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: construction and services Moderate growth: retail, manufacturing, transportation 16

17. College of Business Administration Economic Conditions in Nebraska Longer-Run Forecast for Construction (2% - 2.5%) 17

18. College of Business Administration Economic Conditions in Nebraska Longer-Run Forecast for Services (1.5% - 1.8%) 18

19. College of Business Administration Economic Conditions in Nebraska Longer-Run Forecast for Retail Trade (1% in 2014) 17

20. College of Business Administration Economic Conditions in Nebraska Longer-Run Forecast for Transportation (0.5% - 1.5%) 18

21. College of Business Administration Economic Conditions in Nebraska Longer-Run Forecast for Manufacturing (0.3% - 0.7%) 19

22. College of Business Administration Economic Conditions in Nebraska Longer-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. College of Business Administration Economic Conditions in Nebraska Longer-run forecast for total non-farm jobs 20

24. College of Business Administration Economic Conditions in Nebraska Longer-Run Forecast for income and population Rate of Growth Measure 20142015 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. College of Business Administration THANK YOU Any Questions? 22