Fausti, Scott

Opoku, Emmanuel

English

Research Papers in Economics

 
_________________ 
*Contact the authors at Emmanuel.Opoku@sdstate.edu or Scott.Fausti@sdstate.edu or 605-688-4141. 
 
            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. 533                         August 29, 2011
 
 Economic Outlook  
for the Second Quarter 
 
by 
Emmanuel Opoku* 
Research Associate 
Scott W. Fausti* 
Professor of Economics 
 
Introduction 
The outlook for the economy remains weak as the 
recovery slowed down sharply in the months of May 
and June. Crude oil prices recorded a low of $93.01 
per barrel on June 24, 2011 having reached a record 
high of $113.93 in April 25, 2011. The fall was 
triggered by the pronouncement from International 
Energy Agency (IEA) to release 60 million barrels of 
oil from global markets to offset disruptions of the 
production from Libya and other oil producing 
countries
1. 
 
Employment 
The Bureau of Labor Statistics reported an increase in 
employment by 117,000 jobs in July 2011
2. This 
indicates a marginal improvement of June’s figure of 
54,000 job gains. Health care, retail trade, 
manufacturing and mining recorded job gains. 
Employment levels in other major private-sector 
industries were little changed, and employment in the 
manufacturing industry had risen by an average of 
24,000 per month since May 2010. The industrial 
sector has added 246,000 jobs since a recent low in 
March 2010. Local government recorded 28,000 job 
losses over the month and has lost 446,000 jobs since 
an employment peak in September 2008. (See Fig.1). 
The decline in jobs in May offers startling evidence 
that the U.S. economy is slowing, hampered by high 
gas prices and natural disasters in Japan that have  
 
affected manufacturers. The marginal job gains in 
July exhibits a glimmer of hope but the private 
sector will have to be given the needed impetus for 
expansion through an increase in consumer demand 
for goods and services to sustain job creation. 
 
 
 
Unemployment 
The U.S. Bureau of Labor Statistics reported a 0.1% 
fall in the unemployment rate from 9.2% in June to 
9.1% in July 2011. Nevada registered a 12.9% 
unemployment rate, the highest among the states, 
where as North Dakota reported the lowest 
unemployment rate of 3.3%. The total number of 
unemployed peaked at 13.9 million as compared to 
13.7 million in April 2011. There are 2.8 million 
persons who were marginally attached to the labor 
force; about 1.1 million of these marginally attached 
were discouraged workers. The official 
unemployment rate includes only job seekers who 
are actively looking for work.  Underemployed 
workers (those who indicate they would like full-
employment) and discouraged workers (individuals 
who would like to work but are not actively 
engaged in a job search) are not included in the 
official unemployment statistics. A measure of  
unemployment (U-6) that includes workers who are 
underemployed and those who are marginally 
attached to the labor force declined from 16.5% in 
July 2010 to 16.1% in July 2011. 
 
 
 
Industrial Production 
Industrial production edged up 0.1% in May 2011. 
There was an increase of 0.4% in manufacturing 
production. The output of motor vehicles and parts 
has been held down in the past two months because of 
supply chain disruptions following the earthquake in 
Japan
3. Excluding motor vehicles and parts, 
manufacturing output advanced 0.6% in May and 
edged down 0.1%  in April; the decrease in April in 
part reflected production lost because of tornadoes in 
the South at the end of the month. Outside of 
manufacturing, the output of mines increased 0.5% in 
May, while the output of utilities fell 2.8%. At 93.0% 
of its 2007 average, total industrial production in May 
was 3.4% above its year-earlier level. Capacity 
utilization for total industry was flat at 76.7%, a rate 
3.7 percentage points below its average from 1972 to 
2010. 
 
Economic growth 
Real gross domestic product (GDP) is the output of 
goods and services produced by labor and capital 
located in the United States. There is a sharp 
slowdown of economic growth as real GDP increased 
at an annual rate of 1.8% in the first quarter (Q1) of 
2011
4.  The real GDP increased at 3.1% and 2.6% in 
the third quarter (Q3) and fourth quarter (Q4), 
respectively. (See Fig.3). However, Government 
Consumption and Gross Investment declined at 1.7% 
in the Q4 and 5.1% in Q1. The decline in federal 
government spending and state and local government 
spending partially offset increases in personal 
consumption expenditure, private investments and 
exports.  
 
 
International Trade 
The U.S. trade in goods and services reported in 
June for exports was $170.9 billion and imports 
totaled $223.9 billion in June. As a result, the U.S. 
had a goods and services deficit of $53.1 billion. 
June imports were $1.9 billion less than May 
imports of $225.8 billion, whereas exports in June 
were $4.1 billion less than May exports of $175.0. 
The goods and services deficit increased $6.2 
billion from June 2010 to June 2011. Exports 
increased 18.8% ($27.8 billion) and imports were 
up 15.9% ($30.0 billion). The increase in exports 
from June 2010 to June 2011 was due to an increase 
industrial supplies and materials, capital goods; 
foods, feeds, and beverages; consumer goods; 
automotive vehicles, parts, and engines. The rising 
trade deficit implies import levels are rising faster 
than the export levels.  
 
  
Energy and Oil Prices 
Crude oil prices recorded a low of $93.01 on June 24, 
2011 having reached a record high of $113.93. The 
fall was triggered by the pronouncement from 
International Energy Agency (IEA) to release 60 
million barrels of oil to offset the disruptions of the 
production from Libya and other oil producing 
countries. Fifty percent of the total, which constitutes 
30 million barrels, will be released from U.S. strategic 
petroleum reserves whereas the remaining half will be 
released by other members of the agency. The U.S. 
was the world’s largest petroleum consumer in 2010 
using 19.1 million barrels per day. The U.S. Energy 
Information Administration (EIA) estimates U.S. net 
import of crude oil and refined petroleum products for 
2010 at 9.4 million barrels per day. According to 
AAA’s Daily Fuel Gauge Report, U.S. average 
gasoline price fell to $3.61 per gallon on June 23, 
having reached its 2011 record high of $3.98 per 
gallon on May 5, 2011
5. 
 
South Dakota Economy 
The economy of South Dakota continues to slowly 
recover from the Great Recession. With a labor force 
of 447, 512, South Dakota has 426,553 employed and 
20,959 (preliminary estimate) unemployed. Total 
nonfarm employment for July 2011 was 408,100 
(preliminary estimate). Between July 2010 and July 
2011, South Dakota gained a meager 4500 nonfarm 
jobs. The state’s unemployment rate of 4.7% trails the 
4.1% and 3.3% rate of Nebraska and North Dakota, 
respectively. South Dakota’s over-the-year change in 
unemployment rate remained stable at 4.7% from July 
2010 to July 2011. 
 
The Rapid City Metropolitan Statistical Areas (MSA) 
and Sioux Falls MSA reported a 4.6% unemployment 
rate for the month of June. The over-the-month 
change in unemployment for the two MSAs in South 
Dakota reported promising results. The Rapid City 
MSA unemployment rate fell from 5.7% to 5.0% 
(March and April 2011) and that of Sioux Falls 
decreased from 5.4% to 4.7% in the same period. The 
Rapid City MSA gained 900 nonfarm jobs between 
March and April 2011. The Sioux Fall MSA gained 
2,300 nonfarm jobs in the same period. Job gains for 
the two MSA were contributed mainly by additions 
from the leisure and hospitality industry, as well as 
mining, logging and construction. 
 
However, the Rapid City MSA region reported 
over-the-month job gains in March and April, but 
over-the-year change in employment declined by 
900 (1.5 %) in that same period. The Sioux Falls 
MSA region reported its over-the-year change in 
employment increased by 1,100 (0.8%).  
 
South Dakota’s leading economic indicators point 
to a robust growth in the three months ahead. The 
Business Conditions Index is a mathematical 
average of indices for new orders, production or 
sales, employment, inventories and delivery lead 
time. The Business Conditions Index from a 
monthly survey of supply managers declined to 55.2 
in July, from June’s healthy rate of 63.1
6. 
According to Ernie Goss of Creighton University, 
healthy employment growth in the state has pushed 
South Dakota’s unemployment rate down by 0.1%. 
Recent survey results point to positive but slow job 
growth and a flat unemployment rate for the next 
three months. This implies that if manufacturers 
continue to expand production as reported this 
month, the state will experience an upward trend in 
employment levels in the months ahead. 
 
US Debt Ceiling  
According to the U.S. Treasury Department, the 
debt limit is the total amount of money the U.S. 
government is authorized to borrow to meet its 
existing legal obligations, including Social Security 
and Medicare benefits, military salaries, interest on 
the national debt, tax refunds, and other payments. 
The debt limit does not authorize new spending 
commitments. It simply allows the government to 
finance existing legal obligations that Congresses 
and presidents of both parties have made in the 
past
7. 
 
Although Congress managed to pass the bill on 
raising the debt ceiling after political discord on 
August 2, 2011, passage did not prevent S & P from 
downgrading the U.S. credit rating from top-tier 
AAA to one level lower (AA-plus) on August 5, 
2011. 
 
The impact of US credit down grade on the 
economy 
The AAA rating awarded to the U.S. in 1917 was 
counted as zero-risk rating. Lowering of the credit 
rating by S&P and ranking the U.S. at AA is at par 
with the rankings awarded to South Korea and New  
 
 
S
O
U
T
H
 
D
A
K
O
T
A
 
S
T
A
T
E
 
U
N
I
V
E
R
S
I
T
Y
 
E
c
o
n
o
m
i
c
s
 
D
e
p
a
r
t
m
e
n
t
 
B
o
x
 
5
0
4
 
B
r
o
o
k
i
n
g
s
,
 
S
D
 
 
5
7
0
0
7
-
0
8
9
5
 
 
C
h
a
n
g
e
 
S
e
r
v
i
c
e
 
R
e
q
u
e
s
t
e
d
 
 
Zealand. A dip in the rankings implies that the 
repayment risk of lending to America has increased 
and could impact Americans in the following ways: 
1) increase in interest rates, 2) increase in lending 
rates, 3) increase in cost of products, 4) decrease in 
profit, 5) negative impacts on stock markets, 6) jobs 
lost and unemployment increase, and 7) a decrease in 
GDP.
8 
 
Economic outlook for the Second Quarter  
The economic outlook for the second quarter is 
positive since the reduction in crude oil will continue 
to impact total employment levels as companies will 
be willing to hire in order to boost production. U.S. 
economic indicators discussed above suggest that the 
economic activity will continue to slowly improve. 
 
The IEA’s released 60 million barrels of oil from its 
various reserves in order to boost supply and lower 
gas  prices.  Companies  expanded  production 
triggered marginal job gains in July. I anticipate a 
decline in the rate of inflation due to an expected 
continue  decline  in  energy  prices.  The  S&P 
downgrade  of  U.S.  credit  ratings  will  impact  the 
lives  of  average  Americans  as  interest  rate  are 
expected to increase, and more importantly, cost of 
production  is  expected  to  edge  up,  restricting 
companies  from  hiring  and  this  will  trigger  a 
slowdown in the rate of job growth.  
********************************************************** 
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 
80 copies of this newsletter were produced at a cost of less than $100 
 
                                                 
1 http://www.iea.org/press/pressdetail.asp?PRESS_REL_ID=418  
2 http://www.bls.gov/  
3 http://www.federalreserve.gov/releases/g17/current/  
4 http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=310&Freq=Qtr&FirstYear=2009&LastYear=2011  
5 http://www.eia.gov/steo/  
6http://www.creighton.edu/business/economicoutlook/regional/midamericanstates/southdakota/historicaldata/2011/index.php    
7 http://www.treasury.gov/initiatives/Pages/debtlimit.aspx  
8 http://www.charteredclub.com/how-will-sp%E2%80%99s-downgrade-hurt-the-us-and-impact-americans-in-7-ways/  

Economic Outlook for the Second Quarter

http://repec-sda.sdstate.edu/repec/sda/pdf/Commentator/No533.pdf

Economic Outlook for the Second Quarter

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics