Opoku, Emmanuel

Scott Fausti

English

Research Papers in Economics

*Contact the authors at Scott.Fausti@sdstate.edu or Emmanuel.Opoku@sdstate.edu or call 605-688-4141.   We also wish to  
gratefully acknowledge the assistance of Kyle Mason, a high school student who assisted with data collection. 
            E C O N O M I C S 
   C O M M E N T A T O R 
South Dakota State University      No. 530                              April 29, 2011
 
ECONOMIC OUTLOOK: 
FIRST QUARTER 2011 
 
by 
Emmanuel Opoku, 
Research Associate, 
  Scott Fausti,* 
  Economics Professor 
 
Introduction 
The fiscal and monetary policy actions taken over 
the past few years by the federal government have 
aided the economic recovery.  The extension of tax 
relief and unemployment benefits continues to aid 
the recovery process.  The price of petroleum has 
increased from an average of $80 per barrel last year 
to over $100 per barrel in recent weeks.  There is a 
growing concern that the spike in energy prices will 
dampen U.S. economic recovery.  The other 
headwind the U.S. economy is facing this year is the 
reduction in state and local government spending.  
Economists estimate that states will face a combined 
$112 billion deficit.  States will be forced to raise 
taxes or cut spending.  Both actions will have a 
negative impact on the U.S. economic recovery.  The 
current economic impact estimate is 0.75% of Gross 
Domestic Product (GDP).  It is estimated that for 
every 1% decline in GDP a million jobs are not 
created.  Currently, state and local budget shortfalls 
could potentially reduce the U.S. economy’s ability 
to create new jobs by 750,000 this year.
1 
 
Employment 
The Bureau of Labor Statistics reported an increase 
in nonfarm employment by 192,000 jobs in February 
2011.
2  The economy added 1.3 million private jobs 
between April 2010 and January 2011.  The increase 
in employment occurred in manufacturing, 
construction, professional and business services,  
 
 
and health care, as well as transportation and 
warehousing.  Manufacturing and construction 
sectors gained 33,000 jobs in February 2011.   
Health care employment continues to increase.   
In February, the health care sector gained 34,000 
jobs which represent the highest sector gain in the 
monthly report. The total employment level 
increased by 227,000 jobs from February 2010 to 
2011. (See Fig.1) 
  
 
Source: Bureau of Labor Statistics 
 
Unemployment 
The Bureau of Labor Statistics reported a decrease 
in unemployment to 8.9% from 9.0% in January 
2011.
3   The total number of unemployed was 13.7 
million as compared to 13.9 million in January 
2011.  The annual U.S. unemployment rate 
declined from 9.7% in February 2010 to 8.9% in 
February 2011, representing 0.8% change. (See 
Fig.2)  A broader measure of unemployment that 
includes workers who are underemployed and 
those who are only marginally attached to the labor 
force (U-6) reached a record high of 17.4% in 
October 2009, fell to 16.5% in January 2010, and 
increased again to 17.1% in September 2010 
before falling to 16.1% in January 2011. 
 
  
 
Source: Bureau of Labor Statistics 
 
 
Industrial Production 
From February 2010 to February 2011, U.S. 
industrial production increased 5.6%.  Mining and 
manufacturing output increased 6.8% and 6.9%, 
respectively.  In January 2011 a slight weakening in 
industrial production occurred, as the overall level of 
production declined by 0.1% with the largest decline 
occurring in the manufacturing sector which 
declined 0.3%.
4  The recession has greatly affected 
the level of industrial production as U.S. industrial 
production fell 15% during the 2008-2009 period.  
As a result, industrial production declined to 1998 
levels
5.  The minimal increase in industrial 
production did not impact Industrial Capacity 
Utilization (ICU) as it remained unchanged from 
January 2010 to February 2011.   
 
Source: Bureau of Economic Analysis 
 
 
 
 
 
Economic Growth 
The U.S. Census Bureau reported an annual Real 
GDP growth rate of 2.8% in the fourth quarter 
(Q4) of 2010 as compared to the third quarter (Q3) 
rate of 2.6%
6.  The increase in Real GDP in Q4 
was primarily due to increases in personal 
consumption expenditures, in residential fixed 
investment, in private residential investment, and 
exports coupled with a decrease in imports.  
Consumer spending which accounts for about 70% 
of GDP, increased at an annual rate of 4.4% in Q4.  
Real gross domestic product is the inflation 
adjusted level of output of goods and services 
produced by labor and capital located in the U.S. 
 
International Trade 
U.S. trade in goods and services peaked during the 
latter part of fall 2010.  The levels of monthly 
imports and exports recorded an increase in the 
fourth quarter.  This led to a rise of the U.S. trade 
deficit from $40.6 billion in December 2010 to 
$46.3 billion in January 2011. The rising trade 
deficit implies that import levels are rising faster 
than export levels.
7  The increased crude oil price 
of $84.34
8 in January from its December price of 
$79.78 per barrel contributed to rising U.S. imports 
which impacted the trade deficits.  This trend, if it 
continues, could pose additional risk to a sustained 
recovery for the U.S. economy. (See Fig.4) 
 
 
 
 
Source: U.S. Census of Economic Analysis 
  
 
Bright spot  
Factors including the high level of unemployment 
and the low level of capacity utilization continue to 
restrain the inflation rate.  The core rate of retail 
inflation for the last three years has been 1.7% 
(2008), 1.8% (2009), and 0.8% (2010).  The decline 
in retail inflation is more dramatic when food and 
energy prices are included: by this measure, inflation 
for the past three years has been 0.1% (2008), 2.7% 
(2009) and 1.5% (2010).
9  However, there is concern 
that the core rate of retail inflation may not continue 
to improve due to rising commodity prices.  An 
increase in the core inflation rate would reduce 
consumer purchasing power and dampen the rate of 
economic recovery. 
 
Energy and Oil Prices 
The two most important factors that determine the 
price of a barrel of oil are the fundamental laws of 
supply and demand and fear.
10   The U.S. Energy 
Information Administration (EIA) estimated a rise in 
crude oil prices in February with the spread of 
political unrest in North Africa, including violent 
uprisings in Libya which have led to the shutdown of 
much of its oil production.  EIA expects regular-
grade retail gasoline prices to average $3.71 per 
gallon during this year's summer peak driving season 
(June through August).  Increasing uncertainties 
about oil supply have currently pushed the price of 
oil prices to its highest level since 2008.  
The EIA estimated that residential heating oil prices 
will continue to rise.  In the period ending March 7, 
2011 the national average residential heating oil 
price increased to $3.87 per gallon which is $0.95 
higher than this time last year.  According to the  
American Automobile Association (Triple A), the 
average American household travels 12,000 miles 
per year, and if we use the EIA gasoline price 
estimates summary in 2010 and 2011 then someone 
with a car which runs 25 miles per gallon is likely to 
spend $1,708.80 ($3.56 per gallon) in 2011 
compared to $1,334.40 ($2.78 per gallon) in 2010.  
This implies that an average American will spend 
$374.40 more on gasoline in 2011. 
South Dakota Economy 
The South Dakota economy has continued to 
improve since the end of the recession.  Total 
nonfarm employment for January 2011 was 402,900 
(preliminary estimate).  This reflects a decline in SD 
employment.  In November, SD employment was 
estimated at 404,100, increasing to 408,800 in 
December 2010 (seasonally adjusted).  South Dakota 
had 409,000 jobs prior to the recent recession which 
started in December 2007.  The Rapid City MSA lost 
2,400 jobs between November 2010 and January 
2011.  The Sioux Falls MSA lost 3,000 jobs between 
November 2010 to January 2011.  The South Dakota 
over-the-year change in unemployment rate declined 
from 5.2% in January 2010 to 4.7% in January 2011.  
The state’s unemployment rate has remained stable 
at 4.7% for three consecutive months.  The Rapid 
City Metropolitan Area (MSA) unemployment rate 
increased from 4.7% in November to 5.2% in 
December 2010, and the Sioux Falls MSA 
unemployment rate increased from 4.3% to 4.9% in 
the same period.  
South Dakota’s leading economic indicators point to 
healthy growth into the third quarter of this year.
11   
A monthly survey conducted by Ernie Goss from 
Creighton University reported an improvement of 
South Dakota Business Conditions Index (based on 
supply managers).  The Index increased from 61.1 in 
January to 64.5 in March 2011. As a result of 
continued improvement of the index, Prof. Goss 
predicts an expansion in SD employment for the 
durable and nondurable manufacturing sectors, and 
for the overall economy into the third quarter of this 
year. 
Outlook for the First
 
Quarter 2011 
The economic outlook for the next quarter is positive 
as the unemployment rate continues to edge 
downward.  The rate of inflation remains contained. 
U.S. economic indicators discussed above suggest 
that the overall level of economic activity in the U.S. 
economy continues to improve.  The current uprising 
in part of North Africa and the Middle East will 
impact oil prices.  However, prudent fiscal and 
monetary policy initiatives should continue to 
stimulate the economy and help create more jobs. 
Potential stumbling blocks to continued economic 
recovery are: 1) a national decline in state and local 
spending and increased taxes at the state and local 
level, 2) raising energy prices, and 3) an unexpected 
increase in the rate of inflation due to an additional 
spike in energy prices. 
  
 
 
 
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Endnotes:____________ 
1 http://www.cbpp.org/cms/?fa=view&id=711   
2 http://bls.gov/  
3 http://bls.gov/news.release/archives/empsit_03042011.htm  
4http://federalreserve.gov/releases/g17/Current     
5http://federalreserve.gov/releases/g17/revisions/current/table1a
_rev.htm 
6http://www.bea.gov/newsreleases/national/gdp/2011/gdp4q10_
2nd.htm  
7http://www.census.gov/foreign-trade/Press-
Release/current_press_release/ft900.pdf 
8 http://www.census.gov/foreign-trade/ 
trade/statistics/historical/petr.pdf 
9 ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt  
10 http://www.economist.com/node/18285768  
11http://www.creighton.edu/business/economicoutlook/regional/
midamericanstates/southdakota/index.php  
 
*********************************************************** 
ECONOMICS COMMENTATOR 
********************************************************************************** 
Department of Economics       
South Dakota State University                 Phone: 605-688-4141 
Box 504   Scobey Hall       Fax:   605-688-6386 
Brookings, SD 57007-0895          E-Mail: Penny.Stover@sdstate.edu 
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Economic Outlook: First Quarter 2011

http://repec-sda.sdstate.edu/repec/sda/pdf/Commentator/No530.pdf

Economic Outlook: First Quarter 2011

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