The Wisconsin Economy
How will this subprime economy play out in Wisconsin? As I have written in most of my previous forecasts, the Wisconsin economy is diversified and continues to grow at a steady pace. This economic balance keeps us from booming in good times and busting in bad times.
For 2008, the economic forecast for Wisconsin, as offered by Global Insight’s report to the Wisconsin Department of Revenue, suggests that Wisconsin will follow the U.S. forecast. Wisconsin personal income growth, the basis for consumer spending, is projected to be 4.3 percent compared to the projected U.S. growth rate of 5.2 percent. Wisconsin personal income growth continues to be influenced by slow growth in the Milwaukee and Racine metro areas. Low growth rates in these regions offset higher growth rates in the Madison, Appleton, Green Bay and La Crosse metro areas.
A number of economic trends in the Wisconsin economy could boost economic growth prospects for 2008.
- Wisconsin will not be hit by the subprime crisis as hard as most other states. Mortgage foreclosures in Wisconsin are half the national average.
- Wisconsin consumers have above national average credit scores and lower debt levels.
- Booming export sales are employing manufacturing workers in Wisconsin. Exports in 2006 were over $17 billion dollars, a 50 percent increase over a three-year period.
- Wisconsin business, particularly the technology business sector, is expanding and creating wealth. A buyout and initial public offering of just two companies, Tomo Therapy and Nimble Gen, produced nearly a half a billion dollars in wealth creation for investors. Angel investing in the state continues to rise as the number of formal angel groups in the state approaches 20.
- Regional economic development groups like New North, Thrive, M-7, Centergy, and Grow North are beginning to have a positive impact on economic development and technology transfer.
The U.S. Economy in 2008
The current set of economic problems has led to very cautious predictions for 2008. About 20 of economists now think we could have a recession in 2008. Alan Greenspan puts the chance of recession at 50 percent. The Federal Reserve in its first ever forecast for the U.S. economy pegs 2008 growth in Gross Domestic Product (GDP) at 1.8 percent to 2.5 percent. The White house lowered its forecast of GDP growth in 08 to 2.7 percent. And Global Insights sees growth in GDP of about 2.8 percent.
These forecasts are typical of the thinking in the economic community as of December 2007. But these forecasts were hardly out the door when we saw unexpectedly high Black Friday and Cyber Monday retail sales beating forecasts by about 10 percent. Thereafter came a robust report from the Business Roundtable. That survey of companies with aggregate sales of $4.3 trillion showed that over 75 percent of the firms expected no change or positive growth in sales, hiring, and capital investment. Additional data late in 2007 showed that the U.S. economy had its best quarter in four years (4.9 percent economic growth in the third quarter of 2007), productivity surged, and corporate insiders bought more shares in the third quarter of 2007 than any other time in the last four years.
Despite very serious problems in the housing sector, the U.S. economy continues to be very resilient. It is important to keep in mind the sheer size of the U.S. economy. Many discount the U.S. economy in favor of emerging market economies. Yes it is true that China and India are growing their economies at a double digit rates and are creating global market opportunities. And the U.S. growth rate has been around 3 percent over the last three years. But keep in mind that if the U.S. economy grows 3 percent on a base of nearly $14 trillion, that produces nearly a half a trillion dollars in economic growth. By contrast, if China grows at 10 percent on a base economy of less than $4 trillion, that produces less than a half a trillion in economic growth.
Why the U.S. Economy May Beat the Economic Forecasts
The U.S. economy has less economic risk (risk of recession) than at any time in its history. In the last 16 years we have had one very short, very mild recession. This large, nearly $14 trillion dollar economic engine is in my view less risky today because:
- As we have lost low value, cyclical manufacturing jobs and product, we have also reduced the cyclical risk that goes along with manufacturing.
- We spend more on health care (now about $1 of every $6 of economic activity in the U.S.), and most of that sector is not subject to short term recessionary risk.
- And as the number of retirees increases, the portion of national income drawn from transfer sources funded by assets or taxes increases. Put simply, we derive more of the national income from Social Security and pensions and that income too is far less subject to downturns in the national or global economy.
But the real reason I believe the overall economy will do well in 2008 is all about politics. 2008 is a presidential election year. The table below shows growth in the GDP in presidential election years and the year before election year since 1972.
The good news is that in a year of presidential politics, it is highly unlikely that the subprime mortgage crisis will be ignored by either the White House or the Congress. Both will act to fashion some sort of assistance or bailout. That said, the bad news is that no matter what the politicians do, it will take some time to normalize mortgage and credit markets and additional time to prime the pump to boost home building and sales.
Information from: news.wra.org
