Bureau of Business Research
Date of this Version
Business in Nebraska, July 2010, (64)698: 8 pages
U.S. Macroeconomic Outlook
The U.S. economy is persevering in its transition to a self-sustaining recovery fueled by private consumer spending and business investment. But, that transition is tenuous, with factors both encouraging and discouraging growth. Among factors encouraging growth, consumer spending and business investment continue to expand, supported by rising wage income and profits. As is typical in an economic recovery, profits have rebounded as businesses which cut costs during the recession are benefiting from rising revenue. The labor market also has begun to recover. While gains have been limited, the U.S. economy has added private sector jobs over the first six months of 2010. Further, the average hours worked per week has grown modestly, buttressing these modest employment gains. The net impact has been growth in total hours worked in the private sector. This underpins growth in income, and ultimately, consumption. These positive trends in profits and wage income should be enough to sustain the economic recovery, especially as Federal Reserve policy continues to accommodate economic growth.
But, the U.S. economy also faces many challenges. These challenges imply that the recovery will be moderate rather than sharp and that the potential exists for a second recession. To begin with, the economy continues to face challenges from the housing and commercial real estate markets. Continued foreclosures and a large inventory of unsold homes and unused commercial properties continue to limit new construction and price growth. As a result, the construction industry, which typically fuels growth during an economic recovery, is continuing to shed jobs.
The U.S. economy also faces the effects of debt contagion in Europe. Heightened risk of sovereign and bank default will slow European growth, and lower corporate earnings and the appetite for risky investment worldwide. All three factors have limited growth in the U.S. over the last few months and will continue to do so. Finally, the U.S. economy continues to face headwinds due to public policy. Many new regulations have been introduced into the economy during the last two years. Further, over the past decade, the federal government has rapidly increased spending, and significantly expanded health care entitlements. These trends have continued in the last two years. Such spending increases imply higher future tax rates, which discourage investment, work and economic growth. The first such tax increases are likely to occur in the next year. As noted earlier, these challenges imply a modest expansion, and potential for a second recession.
Facing these headwinds we expect modest growth in the U.S. economy over the next 3 years. Real GDP will grow by 3.0% in 2010, by 2.8% in 2011, and by 2.5% in 2012. Employment growth will be tepid and unemployment rates will drop slowly. The consumer price index is expected to rise by 1.5% in 2010, 1.7% in 2011, and 2.5% by 2012. As in recent years, economic conditions will be relatively strong in Nebraska. Nebraska continues to have a favorable industry mix, with strength in agriculture and insurance. Nebraska consumers also face fewer problems from unemployment and falling home prices.
Construction and Mining
Transportation and Utilities
Nonfarm Personal Income
The Bureau of Business Research is grateful for the help of the Nebraska Business Forecast Council. Serving this session were
- John Austin, Department of Economics, UNL;
- Chris Decker, Department of Economics, UNO;
- Tom Doering, Nebraska Department of Economic Development;
- Ernie Goss, Department of Economics, Creighton University;
- Bruce Johnson, Department of Agricultural Economics, UNL;
- Ken Lemke, Nebraska Public Power District;
- Phil Baker, Nebraska Department of Labor;
- Franz Schwarz, Nebraska Department of Revenue;
- Scott Strain, Greater Omaha Chamber of Commerce;
- Eric Thompson, Bureau of Business Research, UNL;
- Keith Turner, Department of Economics, UNO (emeritus)
Copyright 2010 by Bureau of Business Research