Pillars of Growth in Nebraska\u27s Non-Metropolitan Economy

Agriculture is a critical part of Nebraska’s economy, and changes in the fortunes of agriculture play an important role in the success of the state’s non-metropolitan regions. Trends toward consolidation and rising productivity in agriculture, however, have raised concerns about the future of non-metropolitan Nebraska. Some citizens and policymakers have begun to wonder if the economy can create sufficient job opportunities for non-metropolitan residents. The answer to this question depends not only upon the relative strength of the agricultural sector, but also upon the presence of other industries that can join agriculture as pillars for employment growth in non-metropolitan Nebraska. This study, sponsored by the University of Nebraska Rural Initiative, brings together researchers from the University of Nebraska–Lincoln, the University of Nebraska at Omaha, and Creighton University to examine multiple dimensions of Nebraska’s non-metropolitan economy. In addition to agriculture, we will examine the fortunes of five other key industries: 1) manufacturing, 2) tourism, 3) trucking, 4) professional and technical services, and 5) information. This list contains industries that are traditional areas of rural economic development such as manufacturing, agriculture, and tourism, but also includes rapidly expanding industries in our state (trucking) or industries within a rapidly changing national economy (professional and technical services and information). National economic forecasts suggest that industries such as trucking, tourism, professional and technical services, and information will continue to add employment at a moderate to rapid pace over the next decade

Sustained Growth in Nebraska

National Macroeconomic conditions are favorable for future expansion of income, employment, and revenue in Nebraska. In particular, the U.S. economy is now in the heart of an expansion expected to persist over the three year forecast period. The principal engine of growth will be a sustained expansion in private sector investment and consumption demand. However, the rate of growth in the national economy likely will be moderate rather than rapid. At least three factors will act to moderate growth. The first is higher energy prices. Rapid growth in global demand is expected to keep prices for oil and natural gas high at least into 2005. These higher energy prices will reduce the rate of growth in gross domestic product, and create a higher than normal risk that the economy could fall back into recession. However, the most likely outcome is that the economy will continue to expand at a moderate rate in 2005, and beyond. Federal policy trends also will moderate growth. Over the outlook period, Federal Reserve interest rate policy will gradually shift from pro-growth to neutral as the Fed raises interest rates over the next two years. The Federal Funds rate currently stands at 1.75 basis points and a neutral rate is typically in the range of 3 to 4 basis points. The third factor will be a marked decline in the rate of growth in federal spending. Federal spending growth averaged 9 percent annually from 2002 through 2004. Spending growth should decline substantially beginning in 2005 as part of efforts to reduce large annual federal budget deficits

A Long Spell of Uncertainity

We find ourselves in a period of sustained economic uncertainty. Today, like 6 months ago, the U.S. economy is on the brink of a recession. Weakness in lending activity, coupled with weakness in the housing sector and related manufacturing industries has stymied economic growth since late 2007. At times, recession seems imminent. But, the official measures, such as quarterly gross domestic product, do not clearly signal that the economy is contracting. Further, prices are rising rapidly for food and energy. That is the uncertainty. Will 2008 be remembered as a recession year, or as a period of disappointing but slow growth? And, will 2008 be known as the year when inflation reignited in America. In some sense, the answer does not matter. The United States and its citizens already are experiencing some of the consequences of recession, and of higher inflation. Job counts are declining and unemployment is rising. Many face the prospect of losing their homes. Prices including food and energy are rising 2% faster than in most recent years. But, of course, the answer matters quite a lot. If the U.S. economy falls into recession, or if a recession has already begun, job losses will accelerate and unemployment will rise sharply. The real estate and financial markets may spiral down faster. There is also a risk that prices increases will accelerate if inflation in food and energy spreads into wage inflation impacting a broad spectrum of sectors. Our view is that the economy will avoid both a significant recession and rapid inflation. Strong exports will encourage growth, and consumers and the financial sector will slowly work their way through their current difficulties. Inflation largely will be contained to the food and energy sectors. But, the scenario is far from rosy. We expect weak economic growth through 2008 and early 2009, and elevated inflation rates through 2010. In particular, we expected annual growth in real GDP of 1.1% in 2008, 1.7% in 2009. GDP growth rates only returns to trend growth of 2.8% in 2010. Inflation will hit 4.0% in 2008, and will be well above 2% in subsequent years, at 2.6% in 2009, and 2.7% in 2010. A significant slowdown will be avoided because the weak dollar will encourage strong exports, and because consumer spending will expand modestly despite a weak employment situation and high energy prices. Consumer confidence has declined rapidly but consumer spending should stay steady thanks to lower interest rates, and in the very short-term, federal government rebate checks. Current high energy prices also are expected to stabilize, and therefore, will not cause even further strain on consumer spending for other goods and services. This relatively positive scenario naturally assumes that the U.S. economy will avoid other major dislocations. The economy may fall into a significant recession if there are other major disruptions in the financial system that limit access to capital. Inflation may spike further if oil prices rise or additional weather causes further increases in food prices

A Long Spell of Uncertainty

We find ourselves in a period of sustained economic uncertainty. Today, like 6 months ago, the U.S. economy is on the brink of a recession. Weakness in lending activity, coupled with weakness in the housing sector and related manufacturing industries has stymied economic growth since late 2007. At times, recession seems imminent. But, the official measures, such as quarterly gross domestic product, do not clearly signal that the economy is contracting. Further, prices are rising rapidly for food and energy. That is the uncertainty. Will 2008 be remembered as a recession year, or as a period of disappointing but slow growth? And, will 2008 be known as the year when inflation reignited in America. I

An Action Plan For Growing Nebraska

Table of Contents The Need to Act I. Introduction: The Purpose of Report 1 II. The Need to Act 6A. The National Economic and Demographic Environment 7 B. Where Nebraska Stands: A Decade of Too Little Growth And Too Much Taxation 9 C. Nebraska’s Economic Future: What If We Do Nothing? 17 D. We Can Grow Nebraska 22 Action Plan III. Plan Section One: Government Structure and Organization 23 IV. Plan Section Two: Job Creation Incentives and Tax Reductions 41 V. Plan Section Three: Other Enhancements to Keep Nebraskans In Nebraska 104 Exhibits References 135 Appendix A: Youth Retention and Development 139 Appendix B: Demographic Trends and Competitive Strategies for Regions 147 Appendix C: Some of the Latest Ideas in Economic Development among the States and Cities of the U.S. 156 Appendix D: What are Economic Development Incentives? 164 Appendix E: About the Authors 17

The Impact of Unemployment Insurance Benefits on the Probability of Migration of the Unemployed

By ignoring individual unemployment compensation benefits and conditions of job termination, past migration research has concluded that personal unemployment doubles the likelihood of interstate labor-force migration. Findings from the present study indicate that aggregating the unemployed, without adjusting for these two factors, overstates the probability of migration for the involuntarily unemployed benefit recipient and understates the likelihood of migration for the voluntarily unemployed benefit recipient. The results suggest that federal discretionary unemployment-compensation programs, which are implemented during recessionary periods, likely serve to retard out-migration of those who are involuntarily unemployed

Continued Growth in Nebraska

National economic conditions will continue to favor growth over the next three years. Increased business investment will combine with rising industrial production, expanding exports, and moderate increases in consumer spending to grow the economy. The rate of inflation is expected to increase as well. The rate of real (inflation-adjusted) growth will moderate compared to strong economic growth during 2004. Real gross domestic product will grow 3 percent to 3.5 percent over the next three years. High oil prices will remain a drain on the economy, siphoning spending from domestically produced goods and services. Fuel prices are expected to remain at recent high levels throughout 2005 and 2006. Export growth also will remain moderate despite depreciation of the dollar. The Federal Reserve will continue its shift from a progrowth to a neutral monetary policy. The federal funds rate should rise another 0.5 to 1.0 basis points over the next year. Growth in federal spending should moderate from near double-digit growth in 2002 through 2004. Federal spending is expected to continue to expand rapidly, however, and deficits should remain near current levels. Recent increases in the core inflation rate (excluding food and energy prices) are expected to hold over the forecast period. The inflation rate is expected to average 3 percent per year. Rising inflation will lead to a greater divergence between real and nominal growth rates. Nominal income and sales will grow quickly relative to recent years even as real (inflation-adjusted) growth rates moderate. For example, with inflation running 3 percent per year, nominal income will grow between 6.0 percent and 6.5 percent during the forecast period

A Long Spell of Uncertainity

We find ourselves in a period of sustained economic uncertainty. Today, like 6 months ago, the U.S. economy is on the brink of a recession. Weakness in lending activity, coupled with weakness in the housing sector and related manufacturing industries has stymied economic growth since late 2007. At times, recession seems imminent. But, the official measures, such as quarterly gross domestic product, do not clearly signal that the economy is contracting. Further, prices are rising rapidly for food and energy. That is the uncertainty. Will 2008 be remembered as a recession year, or as a period of disappointing but slow growth? And, will 2008 be known as the year when inflation reignited in America. In some sense, the answer does not matter. The United States and its citizens already are experiencing some of the consequences of recession, and of higher inflation. Job counts are declining and unemployment is rising. Many face the prospect of losing their homes. Prices including food and energy are rising 2% faster than in most recent years. But, of course, the answer matters quite a lot. If the U.S. economy falls into recession, or if a recession has already begun, job losses will accelerate and unemployment will rise sharply. The real estate and financial markets may spiral down faster. There is also a risk that prices increases will accelerate if inflation in food and energy spreads into wage inflation impacting a broad spectrum of sectors. Our view is that the economy will avoid both a significant recession and rapid inflation. Strong exports will encourage growth, and consumers and the financial sector will slowly work their way through their current difficulties. Inflation largely will be contained to the food and energy sectors. But, the scenario is far from rosy. We expect weak economic growth through 2008 and early 2009, and elevated inflation rates through 2010. In particular, we expected annual growth in real GDP of 1.1% in 2008, 1.7% in 2009. GDP growth rates only returns to trend growth of 2.8% in 2010. Inflation will hit 4.0% in 2008, and will be well above 2% in subsequent years, at 2.6% in 2009, and 2.7% in 2010. A significant slowdown will be avoided because the weak dollar will encourage strong exports, and because consumer spending will expand modestly despite a weak employment situation and high energy prices. Consumer confidence has declined rapidly but consumer spending should stay steady thanks to lower interest rates, and in the very short-term, federal government rebate checks. Current high energy prices also are expected to stabilize, and therefore, will not cause even further strain on consumer spending for other goods and services. This relatively positive scenario naturally assumes that the U.S. economy will avoid other major dislocations. The economy may fall into a significant recession if there are other major disruptions in the financial system that limit access to capital. Inflation may spike further if oil prices rise or additional weather causes further increases in food prices

A Soft Landing and a Long Layover

The U.S. economy achieved a soft landing in 2006. This was a desirable outcome. The economy needed a break from its rapid, and potentially inflationary, growth in 2004 and 2005, before taking off again. But, that new flight has been delayed. The aggregate economy has remained mired in slow growth in the first half of 2007. Pockets of the economy, such as the labor market, have been strong, but a weak housing sector has limited overall growth. Further, signs point to one or two more quarters of weaker growth, before the economy is able to take off again. This outcome is disappointing, and has been difficult for many individuals and businesses in the construction industry, and related sectors. There was a 25% decline in the number of building permits nationwide between June 2006 and June 2007, a nearly 20% decline in housing starts. This decline had a ripple effect not only in construction but in related industries such as real estate, and segments of manufacturing and finance. Many workers, however, have been unaffected by the decline. The overall labor market in fact has been quite strong. Total employment increased by 1.4% nationwide between June 2006 and June 2007, and the unemployment rate currently sits at 4.5%. This pattern of solid employment growth despite weak growth in gross domestic product is typical of the later stages of the businesses cycle. In many ways, it is the mirror image of the “jobless recovery” that occurred in 2002 and 2003 when the national economy pulled out of the 2001 recession. At that time, firms squeezed productivity out of the economy, expanding output rapidly without increasing employment. Expenses were cut and employees worked long hours. By now, many of these opportunities have been exhausted and firms must expand employment to increase output. Thus, there is solid employment and earnings growth even when economic growth is tepid. Nationwide, 1.2% job growth is expected for 2007. But, job growth will need to accelerate as the economy returns to trend growth in 2008 and 2009. Job growth of 1.4% is expected for 2008 and 1.7% for 2009%. Growth in real (inflationadjusted) gross domestic product will reach only 1.9% in 2007 before rising to 2.8% in 2008 and 3.1% in 2009. We see only a small chance of a recession in the next four quarters. Given expectations that the economy will return to trend growth next year, the Federal Reserve will have little incentive to lower interest rates. But, there also will be no need to increase rates as inflationary pressures recede. The consumer price index was up 2.5% in the first half of 2007 versus 3.8% in the first half of 2006. Inflation rates should stabilize at this level. For all of 2007, we expect inflation of 2.3%. Inflation is expected at 2.5% in both 2008 and 2009. Gasoline prices are expected to remain steady over the next few years. To be sure, prices will continue to fluctuate seasonally, spiking in the summer and declining in the spring and fall. But, a permanent decline is not expected. Unfortunately, we are currently experiencing the “new normal” price for gasoline in the summer. Commodity prices in general are expected to stay strong. In many ways this will benefit states such as Nebraska where commodity production is an important part of the economy