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 1

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

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

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

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

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

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

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

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

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 This is according to two UNL monthly reports The Survey of Nebraska Business The Leading Economic Indictor – Nebraska 10

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

College of Business Administration Economic Conditions in Nebraska Survey of Nebraska Business 12

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

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

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

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

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

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

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

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

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

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

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

College of Business Administration Economic Conditions in Nebraska Longer-Run Forecast for income and population Rate of Growth Measure 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

College of Business Administration THANK YOU Any Questions? 22