'Incredibly bullish': Ernie Goss, Creighton University economist, talks about the Midwest's economic prospects
Editor’s note: Each month, 100 newspapers and some 75 to 100 radio stations carry the Creighton University Regional Economic Report, which is produced under the supervision of Ernie Goss. The report is a widely read barometer of the economic prospects of the region.
Goss is the Jack MacAllister Chair in Regional Economics at the university in Omaha, Neb. He received his doctoral degree in economics from the University of Tennessee and is a former faculty research fellow at NASA's Marshall Space Flight Center.
He was a visiting scholar with the Congressional Budget Office for 2003-04.
Q. Tell us how Creighton's two surveys of economic conditions came about.
The Mid-America Survey of Business Conditions is a monthly survey of supply managers who make purchasing decisions for manufacturing and energy firms covering nine states. The survey was conducted quarterly by Robert Kemp at Drake University until 1992, when Creighton University and I assumed administration of it and converted it to a monthly survey.
It is identical in form and methodology to the national Institute for Supply Management survey, which can be traced back to 1923. Results from the national and the Creighton surveys are released on the first business day of each month.
The other survey, the Rural Mainstreet Index of bank CEOs, was initiated by a collaboration between Bill McQuillan, CEO of CnB Bank in Greeley, Neb., and Creighton University. In 2006, I implemented Bill’s vision.
Bill has since retired to the warmer environs of Arizona. I, on the other hand, continue to tinker away in my Omaha and Denver offices in temperatures, at this time, that are sometimes more amenable to polar bears than humans.
In 2017, the value of earned print media alone from the two surveys was more than $18 million, as estimated by Meltwater Media. The articles written based on data from the two surveys provides Creighton University, supply managers and bankers with unrivaled visibility throughout the region and nation.
Furthermore, the coverage brings focus to economic issues, challenges and opportunities for portions of the nation that otherwise get scant attention from policymakers, media and the national business community.
Q. Have the rural and urban economies in the region diverged over the course of the surveys?
Just as the farmer with one hand in the fireplace and the other in the refrigerator is on average doing well, the agriculturally and energy dependent states have been, on average, doing (performing) well.
But as that example suggests, state averages blend healthy growth in urban areas in each state with economic fatigue in the rural areas of the same states.
Between 2009 and 2013, the Rural Mainstreet survey typically indicated very healthy growth in rural areas dependent on agriculture and energy. During this time period, driven by the Federal Reserve’s easy-money policies that stimulated agriculture and energy exports, our surveys and government data tracked rural areas growing at brisk rates.
In fact, from 2009 to 2013, average yearly export growth in agriculture, food and oil products soared by 12.6 percent.
In 2014, the Fed ended Quantitative Easing (the major stimulus program that had lowered long-term interest rates), and in 2015 began raising short-term interest rates. The end of the Fed’s easy money policies raised the value of the U.S. dollar and restrained exports, particularly of agriculture and energy commodities.
Thus, urban areas of the region, more dependent on manufacturing and housing, continued to expand while rural areas relying on agriculture and energy moved into negative territory.
During the Fed’s less accommodative money polices, 2014-17, the average yearly export sales of agriculture, food and oil products plummeted by 6.3 percent.
As a result, employment in urban areas of the region over the past three years expanded by 4.1 percent, while employment in rural areas of the same states contracted by 0.3 percent.
Q. As you look back over your years with the survey, what are some of the other broad trends that stand out?
One of the consistent findings from both monthly surveys is the shortage of labor. Regardless of the state and time period, both supply managers and bank CEOs, whether rural or urban, regularly report that finding and hiring qualified workers is the No. 1 restraint to the growth prospects for their firm, bank or area.
There are three troubling symptoms that point to ongoing hiring difficulties. First, exploding substance addiction rates have not only increased the region’s health costs, but also pushed workers out of the job market.
Second, more and more workers are leaving the workforce or experiencing unemployment or underemployment due to disability and/or a lack of skills.
Third, skill and education atrophy will ensure that certain workers will not share in the nation and region’s rising economic growth. These workers must educate/reeducate/train themselves to take advantage of a rapidly and continually changing job market.
Unfortunately, more and more of these workers will likely fall by the wayside.
Q. What federal and state policies have had the greatest impact on the regional economies, for better or for worse?
While exports are a relatively small share of gross domestic product for most states in our two surveys, these regional export sales are much more volatile due to the dependence on energy, processed food and agriculture commodities. As a result, state and national policies designed to encourage exports are particularly important in stabilizing and growing our region’s state economies.
For example, the North Dakota District Export Council is a nonprofit organization whose mission is "to raise awareness for the importance of trade for North Dakota businesses.” The organization runs educational seminars and other programs that encourage businesses to initiate or expand exporting activity.
Looking ahead to 2018, the 2017 tax reform plan – which provides for the immediate write-off of plant and equipment purchases – will stimulate both agriculture and manufacturing sectors in Creighton’s survey states.
But the bellicose tone of the Trump administration toward trade and the potential abolition of the North American Free Trade Agreement are real threats to the regional economies, particularly the region’s agriculture sector.
In 2016, businesses and farms in Creighton’s Rural Mainstreet states exported almost $60 billion in goods and commodities to Canada and Mexico, supporting roughly 348,000 jobs in the region. Among the 10 Rural Mainstreet states, North Dakota relies most heavily on NAFTA sales, representing 3 percent of state gross domestic product.
State and national policymakers must understand that trade is not a zero-sum game in which one nation’s gain matches another’s loss. All parties – Canada, Mexico and the U.S. – benefit from NAFTA.
To paraphrase poet Robert Frost, before you build a wall, you better find out what you are walling in and walling out.
Q. What are the region's most important strengths and weaknesses, where the economy is concerned?
The major strength is the very productive agriculture and energy sectors. The No. 1 weakness is the net outmigration of well-educated and productive workers.
Between 2010 and 2017, eight of the 12 states in Creighton’s two survey regions experienced net outmigration. Contrary to the trend, Colorado and North Dakota benefited from individuals moving from other states, with gains of 277,000 and 40,000, respectively.
The remaining 10 states lost about 805,000 people – or 2 percent of their population – from moving to other states.
Migration, or immigration, is a selective process with the highly educated and young most likely to move. According to the Integrated Public Use Microdata Series at the University of Minnesota, all Rural Mainstreet states except for Colorado, Illinois, Minnesota and Wyoming experienced net out-migration of college educated workers under 40 years of age. Unfortunately, without significant policy changes, the majority of states in our two survey regions will continue to lose young, educated workers to other parts of the nation.
Q. Which of the region's economic trends over the years have caught you the most by surprise?
The most surprising trend has been the continuation of “brain drain” for most states in the two regions. Despite very strong economic growth, low rates of unemployment and a bullish economic outlook, states in the region continue to experience net out-migration, particularly of young, highly educated people.
Not only do states lose the most productive who have the potential to contribute to the state for decades, but also the states lose their public education investment in those workers. A majority of college graduates earn their degrees from public universities, which are heavily funded by state governments.
If states are losing more college graduates than they are holding or bringing in, they’re effectively subsidizing other states’ skilled labor forces.
Midwest and Plains states must develop strategies to reduce the cost and increase the benefits of educating young people in the region. One strategy is to provide more targeted education and training that is focused on industries indigenous to the state. As such, community colleges typically do a better job in this regard than universities.
Likewise, high school educators must acknowledge that a significant share of students have neither the interest nor the capacity for a general education as provided by universities.
States must direct resources to recognize student interest and industry needs.
Q. Has your work with the surveys left you bullish about Mid-America, bearish, or maybe both?
The monthly surveys combined with my speaking throughout the region have left me incredibly bullish regarding the economic prospects of the region. Several factors contribute to the region’s growth prospects.
▇ First, the nations that are experiencing the highest economic growth are growing their food demand at an even faster pace. This represents a significant long-term opportunity for the sale of U.S. processed food and agriculture commodities produced by this area of the nation.
▇ Second, the federal government appears to be committed, long term, to the expansion in alternative energy, especially ethanol, wind and solar. The states in our regions have a competitive advantage in the production of all three energy products. This will sustain growth for years to come.
▇ Third, U.S. tax and regulatory policies will underpin the farm economy and the state economies that depend heavily on agriculture. For the first time since 2010, the U.S. has experienced three consecutive quarters of GDP growth above 2.5 percent.
Building on this, I expect the corporate portion of the 2017 tax reform package to boost growth even higher as corporations experience improving after-tax income growth. This growth, along with the tax reform package providing the immediate write-off of plant and equipment purchases, will significantly heighten corporate investment for 2018.
Likewise, the reduced corporate income tax rate on repatriated earnings will ensure that a large share of U.S. corporate earnings parked abroad will be brought home, a portion of which will be invested domestically.
▇ Fourth, U.S. businesses, government and nonprofit organizations are on the verge of the successful integration of artificial intelligence and machine learning.
For a number of years, corporations have stumbled along with artificial intelligence and machine learning applications showing the many ways to fail or experience limited success. These less-than-successful “trials” will usher in successful implementations by later adopters. Unfortunately, companies such as Tesla that have “blazed the trail” will deserve our thanks, but will not be beneficiaries of their path-breaking work. Students and others entering the workforce must be flexible and geared for re-education and training to match this technology-driven environment.
In terms of concerns or challenges, the top two threats to Creighton survey state economies are trade restrictions and rising inflation.
This spring, there is the potential that NAFTA talks will be permanently halted with likely trade restrictions, tariffs and even embargos to follow. This would be very costly for the states in our two regional surveys, with losses in the billions.
Rising inflation represents the second greatest threat to the U.S. states in Creighton monthly surveys.
Should the nation’s inflation rate rise to its annual average between 1988 and the 2008 recession, the Federal Reserve likely would raise interest rates by as much as 2 percentage points, slowing economic growth substantially.
This would also tend to raise the value of the U.S. dollar, making U.S. goods and agriculture/energy commodities less competitive abroad.