The State of the SD

Economy

Presentation to the Governor’s Council of Economic Advisors

May 13, 2015 Ralph J. Brown, Professor Emeritus of Economics

University of South Dakota

Outline of Presentation

Overview of US economy

US economy forecast

SD economy

Summary & Conclusions

US Forecast

Global Insight Forecast –May 7, 2015

Real GDP

Consumption

Housing Starts

Federal Budget

Interest Rates and Inflation

GDP

GDP growth in the 1st

QTR was only

0.2% and will probably be revised

downward.

Special factors such FEB weather, the

dock strike, the energy sector were at

work.

2nd

QTR growth will also be lackluster

Weak inventory growth and continued

energy sector contraction will shave

about 1.4% off GDP growth.

Only modest pickup in the 2nd

half.

Bad 1st

Quarter

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2006 2008 2010 2012 2014 2016

1997-2007

3.0%

GROSS DOMESTIC PRODUCT

Actual Forecast

Source: BEA and IHS

2013 2.2%

2014 2.4%

Forecast

2015 2.3%

2016 2.9%

2017 2.8%

GDP

2011Q3=2007Q4

Components of GDP are:

GDP = Consumption (69%)

Investment (17%)

Government (18%)

Net Export (-4%)

Consumption

Consumption forecast is downgraded slightly.

Modest growth of 3.0% in 2015 and 2016.

So far no pickup due to lower gasoline prices.

Consumers retain the conservative spending stance nearly 6 years after the end of the Great Recession.

Auto sales are forecasted to increase 2.9% in 2015 and 2.1% in 2016.

Deleveraging is Nearly Over

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

70 75 80 85 90 95 00 05 10

BEA and FED

Personal

Saving Rate

HH Debt as %

Disp. Pers. Inc.

130%

102%

60%

92%

HOUSEHOLD DEBT AND SAVING RATE

Revised Downward

-6%

-4%

-2%

0%

2%

4%

6%

-6%

-4%

-2%

0%

2%

4%

6%

2006 2008 2010 2012 2014 2016

Actual Forecast

REAL CONSUMPTION

Source: BEA and IHS

1997-2007

3.6%

2013 2.4%

2014 2.5%

Forecast

2015 3.0%

2016 3.0%

2017 2.7%

Investment Sector

The big bad news is the energy sector.

The Baker Hughes oil rig count has been falling at a rate of 4.3% per week since the first of the year.

More damage is expected in the this sector over the next several quarters.

Another area of concern is inventories. The inventory/sales ratio is at its highest level since the end of the recession.

Housing starts are expected to rise 7.9% in 2015 and 20.5% in 2016.

Equipment spending will rise 5.5% in 2015 and 8.4% in 2016.

Recovery Proceeds

0.4

0.8

1.2

1.6

2.0

2.4

0.4

0.8

1.2

1.6

2.0

2.4

2006 2008 2010 2012 2014 2016

ActualForecast

2013 0.93 Mil

2014 1.00

Forecast

2015 1.08

2016 1.30

2017 1.45

HOUSING STARTS

Source: US Census and IHS

Mil

lio

ns

, U

nit

s

Millio

ns

, Un

its

Government Sector

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

00 02 04 06 08 10 12 14 16 18 20

EXPENDITURES

RECEIPTS

DEFICITS

FORECAST

FEDERAL GOVERNMENT AS % OF GDP

Source: IHS

Debt Held by Public

30%

40%

50%

60%

70%

80%

30%

40%

50%

60%

70%

80%

00 02 04 06 08 10 12 14 16 18 20

FEDERAL DEBT HELD BY PUBLIC

FORECAST

Source: IHS

Foreign Sector

Strong $ has reduced exports and increased imports.

Inflation-adjusted, trade-weighted value of the $ will rise another 3.2% this next year.

At its peak, the $ will be 17.3% above 2014 levels.

Strong $ has reduced non-oil import prices by 2.7%.

This will be deflationary as it will impact domestically competing goods.

When FED starts raising interest rates it will strengthen $ even more.

Modest Growth

-1,000

-800

-600

-400

-200

0

200

400

600

-1,000

-800

-600

-400

-200

0

200

400

600

05 06 07 08 09 10 11 12 13 14 15

NONFARM EMPLOYMENT

P to T

-8.7 mil

-6.3%

Back to P

May 2014

+249,000 mth avg

last 12 monthsch

an

ge

in

th

ou

sa

nd

s

ch

an

ge

in th

ou

sa

nd

s

Source: BLS

Employment & Unemployment

Still Slow Job-Growth Recovery

Unemployment forecast dramatically lower than previous forecasts.

Unemployment rate will average 5.4% in 2015 and 5.1% in 2016.

We still have the issue of low labor force participation rates contributing to the drop in unemployment.

Job Growth Slows

-8%

-6%

-4%

-2%

0%

2%

4%

2006 2008 2010 2012 2014 2016

NONFARM EMPLOYMENT

Source: BLS and IHS

Actual Forecast

1997-2007

1.1%

2013 1.7%

2014 1.9%

Forecast

2015 2.0%

2016 1.4%

2017 1.4%

Lower Than Expected

4%

5%

6%

7%

8%

9%

10%

4%

5%

6%

7%

8%

9%

10%

2006 2008 2010 2012 2014 2016

Actual Forecast

UNEMPLOYMENT RATE

Source: BLS and IHS

1997-2007

4.9%

U6=11.3%

Avg U 32.3 wks

U>27 wks 31.5%

2013 7.4%

2014 6.2%

Forecast

2015 5.4%

2016 5.1%

2017 5.0%

EMP/POP ↓ Sharply

U3 & U6 Unemployment Rates

2%

4%

6%

8%

10%

12%

14%

16%

18%

2%

4%

6%

8%

10%

12%

14%

16%

18%

00 02 04 06 08 10 12 14

Unemployment Rates

Source: BLS

U6

U3

U3=Unemployment Rate

U6=U3+Marginally Attached

& Part-Time for Econ. Reasons

Marginally Attached & Part-Time

2%

3%

4%

5%

6%

7%

8%

2%

3%

4%

5%

6%

7%

8%

00 02 04 06 08 10 12 14

U6-U3

Source: BLS

Marginally Attached

+ Part-Time for

Economic Reasons

US & SD U6

Unemployment Rate

4%

6%

8%

10%

12%

14%

16%

18%

4%

6%

8%

10%

12%

14%

16%

18%

03 04 05 06 07 08 09 10 11 12 13

US

SD

Source: BLS

U6 UNEMPLOYMENT RATE

notice wider spread

Inflation & Interest Rates

Inflation remains under control and well below FED’s 2% target.

FED ended bond buying (QE) in October 2014 and will begin raising rates in September 2015???

Future FED policy will be data-dependent.

If slow growth continues, rate hike could be delayed until 2016.

Still Low

-12%

-8%

-4%

0%

4%

8%

2006 2008 2010 2012 2014 2016

INFLATION: CPI

Source: BLS and IHS

ForecastActual

1997-2007

2.6%

2013 1.5%

2014 1.6%

Forecast

2015 -0.2%

2016 2.0%

2017 2.5%

IHS GLOBAL INSIGHT

FORECAST 2/6/14

Variable 2014 2015 2016 2017

GDP 2.4% 2.3% 2.9% 2.8%

NA Emp 1.9% 2.0% 1.4% 1.4%

Oil(Brent) $100 $57 $66 $74

Housing 1.00 1.08 1.30 1.45

CPI 1.6% -0.2% 2.0% 2.5%

Un Rate 6.2% 5.4% 5.1% 5.0%

IHS GLOBAL INSIGHT

FORECAST May 2015

Risks to Forecast

15% chance of recession.

Risks are:

Wary consumer paying down debt rather than spending.

Slow employment growth and rising unemployment.

Weak foreign economies and lagging exports.

Key Variables Tracking

SD Economy

Nonfarm employment

Housing starts

Real nonfarm personal income

Taxable sales

Leading indicator

Steady Growth

144,000

140,000

136,000

132,000

128,000

430

420

410

400

390

380

05 06 07 08 09 10 11 12 13 14 15

Th

ou

san

ds

Th

ou

san

ds

Source: BLS

NONFARM EMPLOYMENT

SD

US

Ratio

Scale

Job Loss P to T

US -8.7 mil -6.3%

SD -12.7 thous -3.1%

SD Recession

Begins =>

2014 M04

2012 MO2

SD & SF Very Similar

430

420

410

400

390

380

150

145

140

135

130

125

120

05 06 07 08 09 10 11 12 13 14 15

Ratio

Scale

Th

ou

san

ds

Th

ou

san

ds

Source: BLS

NONFARM EMPLOYMENT - SD & SF

SD

SF

Job Loss P to T

SD -12.7 thous -3.1%

SF -4.4 thous -3.2%

US -8.7 mil -6.2%

Recovery – Almost Back

8,000

7,500

7,000

6,500

6,000

5,500

5,000

24

23

22

21

20

05 06 07 08 09 10 11 12 13 14 15

Th

ou

sa

nd

s

Th

ou

sa

nd

s

Ratio

Scale

SD

US

Source: BLS

CONSTRUCTION EMPLOYMENT

P to T

US -29%

SD -16%

Which is More Cyclical?

68

66

64

62

60

58

56

370

360

350

340

330

320

05 06 07 08 09 10 11 12 13 14 15

Service Employment

Right Scale==>

Ratio

Scale

Goods Employment

<==Left Scale

Th

ou

sa

nd

s

Th

ou

sa

nd

s

SOUTH DAKOTA SERVICE AND GOODS

PRODUCING EMPLOYMENT

Source: BLS

Goods-Producing = Manufacturing+Construction

Above Peak

8.8

8.4

8.0

7.6

7.2

6.8

6.4

6.0

5.6

5.2

8.8

8.4

8.0

7.6

7.2

6.8

6.4

6.0

5.6

5.205 06 07 08 09 10 11 12 13 14 15

Th

ou

sa

nd

s

Source: BLS

Th

ou

sa

nd

s

SF CONSTRUCTION EMPLOYMENT

Ratio

Scale

Seasonally

Adjusted

Not Seasonally

Adjusted

Not Quite Back to Peak

0

100

200

300

400

500

600

700

800

900

0

100

200

300

400

500

600

700

800

900

05 06 07 08 09 10 11 12 13 14 15

Total, SD

Single, SD

Un

its

SD Building Permits, Total & Single

12 Month Moving Average

Source: Census Bureau

Very Good Performance

0

100

200

300

400

500

05 06 07 08 09 10 11 12 13 14 15

SF Total

SF Single

12 Month

Moving Avg

12 Month

Moving Avg

Sioux Falls Building Permits

Source: US Census Bureau

SD Peaked Later and

Decline Less Severe

160

150

140

130

120

110

100

90

160

150

140

130

120

110

100

9000 02 04 06 08 10 12 14

Ratio

ScaleUS

SD

Ind

ex

20

00

Q4

=1

00

Ind

ex

20

00

Q4

=1

00

HOUSE PRICE INDEX: PURCHASE ONLY PRICE

Source: FHFA.GOV

SD Back to Peak

14,500

14,000

13,500

13,000

12,500

12,000

11,500

11,000

44

42

40

38

36

05 06 07 08 09 10 11 12 13 14 15

MANUFACTURING EMPLOYMENTT

ho

us

an

ds

Th

ou

sa

nd

s

Source: BLS

Ratio

Scale

SD

USSince 12/2007

US -13.1%

SD -4.8%

MFG %

US 8.9%

SD 9.4%

SF 9.3%

SD Not Back to Peak

8,400

8,200

8,000

7,800

7,600

17.2

16.8

16.4

16.0

15.6

15.2

14.8

05 06 07 08 09 10 11 12 13 14 15

SD

US

Ratio

Scale

Source: BLS

Th

ou

sa

nd

s

Th

ou

sa

nd

s

FINANCIAL ACTIVITY EMPLOYMENT

P to T

US -8.5%

SD -13.0%

Fin %

US 5.8%

SD 6.7%

SF 10.6%

Almost Back to Peak

18

17

16

15

14

13

12

11

18

17

16

15

14

13

12

1105 06 07 08 09 10 11 12 13 14 15

Th

ou

sa

nd

s

Th

ou

sa

nd

s

Ratio

Scale

Financial

Activities

Manufacturing

Sioux Falls Employment - Finance & Manufacturing

Source: BLS

SD 3.4% SF(SA) 3.2%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

05 06 07 08 09 10 11 12 13 14 15

UNEMPLOYMENT RATE

U6 (US)=11.3%

U6 (SD)= 6.4%

Source: BLS

US

SD

SF

1997-2007

US 4.9%

SD 3.2%

SF 2.5%

Nonfarm Employment

(MAR Year-Over-Year Growth)

Industry SD SF RC

Total 1.3% 1.2% 1.1%

Construction 4.8% 9.2% -2.4%

Manufacturing 3.1% 2.2% -3.5%

Retail Trade 2.0% 5.1% 1.1%

Information 0.0% 0.0% 11.1%

Financial Act. -1.0% -0.6% -2.3%

Leisure/Hosp -1.7% -3.7% 4.8%

Government 0.4% 0.8% 1.8%

SD Smaller Decline – Way

Above Previous Peak

$14,000

$13,500

$13,000

$12,500

$12,000

$11,500

$11,000

$36

$34

$32

$30

$28

$26

05 06 07 08 09 10 11 12 13 14

Ratio

Scale

Bil

lio

ns

Billio

ns

Source: BLS

NONFARM PERSONAL INCOME (2009 $S)

SD

US

P to T

US -2.8%

SD -1.1%

US and SD Track

-4%

-2%

0%

2%

4%

6%

8%

00 02 04 06 08 10 12 14

SD

US

REAL NONFARM PERSONAL INCOME

(Year-Over-Year Percent Change)

Souce: BEA

Down

$40

$60

$80

$100

$120

$140

$0

$1

$2

$3

$4

$5

05 06 07 08 09 10 11 12 13 14

Bil

lio

ns

Billio

ns

SD

US

Source: BEA

FARM INCOME

5 Year Avg

% of PI

US = 0.7%

SD = 8.6%

Pretty Good Growth

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

05 06 07 08 09 10 11 12 13 14 15

Large Projects=>

% Change y/y

12-Month

Moving Average

SD TAXABLE SALES

Source: SD Department of Revenue

Big Project =>

a Year Earlier

Steady Growth

$1.8B

$1.7B

$1.6B

$1.5B

$1.4B

$1.3B

$1.2B

$1.1B

$1.0B

$1.8B

$1.7B

$1.6B

$1.5B

$1.4B

$1.3B

$1.2B

$1.1B

$1.0B05 06 07 08 09 10 11 12 13 14 15

Ratio

Scale

SD Taxable Sales - Seasonally Adjusted

Source: SD Department of Revenue

12 Month Moving Average

MAR 2014 to MAR 2015 +4.0%

Forecasting Growth?

-3%

-2%

-1%

0%

1%

2%

3%

05 06 07 08 09 10 11 12 13 14 15

SD

US

LEADING INDICATOR: US & SD

Source: Fed Res Bank of Philadelphia

Six-Month Forecast

of Coincident Indicator

Mid-American States

Leading Indicators - GOSS

April 2015 Index > 50 Growth

Overall 54.2

New Orders 57.1

Sales 58.9

Delivery lead time 54.6

Inventories 49.8

Employment 50.6

“I expect the strong U.S. dollar to push 2015 exports ten percent

below their 2014 levels and slow overall growth below that

achieved in 2014.”

Conclusions

SD economy growing at moderate rate

SF economy growing at faster rate

US economy growing slowly

Only 15% chance of recession

The End