Economic Trends  February 2021 | Creighton Institute for Economic Inquiry

Greetings! Creighton’s monthly survey of supply managers and procurement experts in nine Mid-America states indicates that economic growth is in a range indicating the regional economy is experiencing a healthy economic rebound. The overall index from Creighton’s monthly survey of bank CEOs in rural areas of 10 states climbed above growth neutral for January with expanding farmland prices and agriculture equipment sales.

Professor Ernie Goss, PH.D. Creighton University Jack MacAllister Chair in Regional Economics

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From the Desk of Professor Ernie Goss Mainstreet Versus Wallstreet: Stocks Did Better Under Democrat Presidents Since the onset of Covid-19, Wallstreet, as captured by stock market indices, has significantly outperformed the overall U.S. economy. Since the fourth quarter of 2019 until the end of the fourth quarter of 2020, the Standard & Poor’s 500 index (S&P) soared by 14.6% as the overall U.S. economy (GDP) shrank by 1.2%. This has caused critics to argue that the responses of the Republican Whitehouse, and the Federal Reserve (Fed) to Covid-19, as well as other economic maladies, have benefited Wallstreet business interests at the expense of workers, and small businesses on Mainstreet. Is there merit in the critics’ argument? Figure 1 compares the ratio of the S&P stock average and employee compensation to GDP from 1985 to 2020. As presented, since reaching a low of 52,6% of GDP in 2014 in the Obama Administration, employee compensation has risen to 54.6% in 2019 (the latest data) in the Trump Administration. During this same period of time, the S&P stock average climbed from 11.1% to 15.4% of GDP. However, the Fed has been clearly on the side of the stock market by reducing interest rates during 2020. For example, the yield on the 6-month U.S. Treasury bond tumbled from an average 2.11% in 2019 to 0.37% in 2020.    Table 1 compares the impact of 16 years of Democrat presidencies versus 20 years of Republican presidencies on stocks and workers. As presented in Table 1, stocks and business profits have expanded at a faster pace during Democrat presidencies, while worker compensation excelled under Republican presidencies. Likewise, the Fed appears to have been more supportive of stocks during Democrat presidencies than Republican presidencies by keeping interest rates lower.   While differences between Democrat and Republican presidencies listed in Table 1 are not substantial, they are surprising and contrary to the popular narrative. Furthermore, differences may spring from many factors, just one of which is control of the White House. Number of the Month 70.9% According to the Wallstreet Journal, 70.9% of previous stimulus checks were either saved (36.4%), or used to pay down debt (34.5%).  Thus, the payments failed in the goal to significantly stimulate consumer spending.  Goss Eggs  Recent Dumb  Economic Moves Despite approval by the Obama Administration’s State Department, the Biden Administration killed the Keystone XL pipeline by Executive Order. Apparently, the Biden Administration wants greater infrastructure, but only U.S. taxpayer funded infrastructure. His decision kills high wage jobs that contribute to a cleaner environment (i.e. pipeline delivery is much more environmentally friendly than trucks or trains). I consulted with TransCanada for three years on this project and can report that this decision costs the State of Nebraska $311 million (2018 $$s) in state and local tax collections, and support for K-12 education in 12 Nebraska counites.

Mid-America Manufacturing Begins Year Strong: Inflation Gauge Soars to 10-Year High January survey highlights: For the eighth straight month, the regional Business Conditions Index climbed above the growth neutral level.    The wholesale inflation gauge for the month soared to its highest level in almost 10 years. Despite adding jobs in January, 75% of supply managers identified COVID-19 worker absences as having a negative impact on their businesses. A weak U.S. dollar bolstered exports and restrained imports. Almost one-third of supply manager reported difficulties in international buying as having adverse impacts on their company’s business activity. View the complete Mid-America Business Conditions Report. Rural Mainstreet  Economy Stabilizes in Growth Range:Concerns Over Loan Defaults Drops Significantly January Survey Results at a Glance: Overall index rose to its second highest reading since before COVID-19. Bankers biggest economic concerns for 2021 are excessive inflation and higher long-term interest rates. For the first time since 2013, Creighton’s survey has recorded four straight months of above growth-neutral farmland prices. Farm equipment-sales index rose to its highest reading since April 2013. Approximately 44% of bank CEOs expect low loan demand to be the greatest issue facing their banks for 2021, up from 7% last year at this time. Only 4% of bankers indicated rising loan defaults and bankruptcies represented their greatest concern for 2021, down significantly from the 32% in 2020 survey.    View the complete Rural Mainstreet Report.

The Outlook Professor Goss' Forecast - February 2021: Since the presidential elections, the yield on U.S. long-term Treasury bonds has expanded from 0.83% to 1.17%. I expect that yield to climb by another ¼% (25 basis points) by the end of Q1, 2021. Mortgage rates, which have not expanded yet, will rise by 25 basis points by the end of Q1, 2021. Annualized and seasonally adjusted Q1 2021 GDP growth will range between 2% to 3%.   The Conference Board (February 2021). “Real GDP growth will probably rise by 3.5 percent* (annualized rate) in 4Q20 and 2.0 percent** in 1Q21 as the US economy continues to wrestle with the COVID-19 pandemic. The Conference Board has generated three potential recovery scenarios based on specific sets of assumptions. Our base case forecast yields 1Q21 real GDP growth of 2.0 percent* (annualized rate), and an annual expansion of 4.1 percent for 2021, following an annual contraction of 3.5 percent for 2020. Alternatively, we offer a second more optimistic scenario in which the economy grows 6.4 percent for 2021, following an annual contraction of 3.5 percent for 2020. Finally, we offer a third more pessimistic scenario in which the US economy contracts in 1Q21 before stabilizing over the summer. This scenario yields annual growth of 0.8 percent in 2021.”

The Good Over the past 12 months, according to the Case-Shiller national home price index, housing prices expanded by 9.5% in November (one of the highest on record). Stock prices, as measured by the S&P 500, have soared by 5% since the beginning of 2021. The USDA said U.S. stockpiles of corn and soybeans would shrink to their lowest levels since 2014 and the average price for corn and soybeans this marketing year would be the highest since 2013-14. The latest Purchasing management indices (PMI) for both ISM’s national survey and Creighton’s Mid-America were in a range indicating very healthy manufacturing growth. The Bad U.S. payroll employment expanded at a snail’s pace of 50,000 jobs and 406,000 workers left the labor force. The U.S. debt has climbed to $27.2 trillion. As a percent of GDP, the U.S. budget deficit will rise to its highest level since World War II.  The 2020 trade deficit climbed to its highest level in more than 12 years.

Keep An Eye On U.S. Inflation Report. On March 10, the U.S. Bureau of Labor Statistics releases it consumer price index (CPI) for February. U.S. Retail sales for January. On Feb. 17, the U.S. Census Bureau releases retail and food services sales for January. Look for weaker reports to signal a buying pullback by the U.S. consumer U.S. Jobs Report. On March 5, the U.S. Bureau of Labor Statistics releases its job numbers for February. Another disappointing report would encourage Congress to expand economic stimulus programs.    Creighton’s Rural Mainstreet report. On February 18, Creighton releases its February survey results of bank CEOs in rural areas of 10 states in the Rocky Mountains and Plains states. Growth in the rural economy has been solid and improving.

Ernest Goss, Ph.D.  Email: [email protected]