The U.S. economy is headed for a “soft landing” with growth expected to be down in 2007, but Mississippi’s economy is back on track after being slammed by Hurricane Katrina in August 2005. Those were the conclusions of speakers on the national and state economy at the annual Mississippi Economic Outlook Conference held October 31 in Jackson.
“Growth has slowed in the U.S. economy, and the number one reason for slow growth is the housing market,” said conference speaker Nigel Gault, research director for U.S. Economic Service at Global Insight based in Lexington, Mass.
“We’ve really overshot both in prices and in activity levels. We are now correcting down to more normal levels, and we don’t think we are at the bottom yet.”
The problem with the decline in the housing market is affordability; housing prices have moved out of the reach of people’s average incomes.
“That is why we are now adjusting,” Gault said. “Housing is a very big drag on the growth of the economy in the second half of this year, and we think it will continue to be a drag on the economy in 2007. That is the number one reason we think that growth will remain slow. We think the economy’s potential is about 3% growth on average. Next year we believe it will manage 2.4%, and that is largely because of the housing slowdown. We also believe there will be some spillover effects on consumer spending.”
Increasing home values have fueled consumer spending growth because households have been able to extract equity from increased values of their homes. Some has gone into consumer spending. But Gault projects that next year instead of spending increasing faster than incomes, it will increase more slowly than incomes.
On the positive side, recent declines in gas prices have provided some relief. But Gault said that doesn’t fully offset the negative affects from housing. Other parts of the economy are doing okay, and Global Insight’s view is that will prevent the slowdown from turning into anything worse like a recession.
“Business spending on equipment and structures like industrial and commercial buildings is doing well,” he said. “And exports are also doing well. Growth in the rest of the world is better than in many years, and the dollar is a lot more competitive than it was three or four years ago. The overall picture for the entire U.S. economy is what we would call a soft landing. We would expect growth to accelerate again in 2008.”
One of the issues that must be considered is inflation. Inflation is currently higher than the Federal Reserve would like.
“We believe and would hope the slowdown in the economy and the decline in oil prices will bring inflation down, and at some point in 2007 would allow the Fed to actually lower interest rates,” Gault said. “But with inflation at the moment still uncomfortably high for the Federal Reserve, there is still a risk interest rates may have to move a bit higher. One of the key uncertainties in the outlook is whether the slowdown in growth will do enough to bring inflation down.”
On the state level, output and employment have surpassed pre-Katrina levels, and a reconstruction boom is anticipated for the coming three to five years. The state’s coastal counties, which account for about 15% of the state’s employment and population, are slowly recovering.
Senior economist Dr. Marianne Hill, Mississippi Institutions of Higher Learning, said the gross state product (GSP) rose a modest 2.5% in 2005, due to effects of the storm, but personal income grew 4.9% with a 31% drop in property income more than offset by massive inflows of federal and private assistance. Inflows include those from private insurance companies, estimated at $12.2 billion by Property Claims Service; private contributions for relief efforts, which have topped $1 billion; and federal funds, which are approaching $22 billion.
Hill said other good news is that employment through August 2006 was up 0.2% compared to the same period in 2005, despite the fact that the number of persons employed in coastal counties remained 10.5% below 2005 levels as of August. The state unemployment rate, which had risen to 9.5% in September 2005 after Katrina hit, was down to 6.8% by summer’s end, as recovery activity strengthened.
“State revenue collections have increased dramatically since the hurricane,” Hill said. “Total general fund collections for FY2006 were up 10% over FY2005, boosted by expenditures on post-Katrina recovery. The state sales tax was up 17%, and the individual income tax was up 7%. Collections in the first quarter of FY2007 were up by a stunning 20%.
“Retail sales in the 12 months after Hurricane Katrina were 19% above pre-storm levels. Consumer confidence in the state rose sharply at the beginning of the year, but dropped somewhat in the second quarter of 2006; business confidence levels remained positive and stable.”
More good news is that the employment picture has been steadily improving. About 2,400 more people were employed in the first eight months of 2006 than during the same period in 2005. Employment increases were concentrated in construction, up 11%, and in administration and support, up 8%.
“The latter category includes temporary workers, who have been employed in large numbers in debris removal and other tasks on the Coast,” Hill said. “Other major industries that added sizeable numbers of employees include retail trade, which hired 3,310 more workers; healthcare and social assistance, 2,040; and transportation and warehousing, 1,180. Several industries in durable manufacturing also employed more workers, including wood products, but overall employment in durable manufacturing, and in nondurable manufacturing, as well, dropped.”
Employment in amusements and gaming was at 93% of year-ago levels by July, with several casinos on the Coast back in operation. Coast gaming revenues, which received a tremendous boost from the reopening of the Beau Rivage in the late summer, climbed 3.7% above the levels of August 2005, while Mississippi River gaming, which was largely unaffected by the storm, posted revenues that were 3.7% higher this September than a year ago.
Hill said the short-term outlook is that the post-Katrina construction boom will spark an acceleration of economic growth in the state over the next three to five years. Gross state product is expected to grow 3% in real terms in 2006, with a higher growth rate forecast for 2007 as reconstruction efforts pick up. Employment growth, which is expected to be about 0.9% in 2006, is expected to increase to 1.3% or more in 2007 as the number of persons employed on the Coast reaches and exceeds pre-Katrina levels.
“The near double-digit growth in construction employment in 2006 will gradually slow over the next two years, although the level of construction activity will remain high,” Hill said. “The accompanying increase in wages, salaries and labor income will boost personal incomes, as will the recovery in property income. Overall, a growth rate on the order of 5% or more in personal income is predicted for the next two years, after a rate of close to 7% in 2006. Gradually, as the pace of rebuilding slows, there will be a return to the state’s long-run growth path.”
Looking at longer term trends, economic indicators for 2000-2005 show that the state’s economy followed regional trends, with a slight downward dip in 2005 due to the effects of Hurricane Katrina. Total payroll employment in 2005, at 1,129,800, was lower than in 2000 (1,153,700), due both to falling employment from 2001 to 2003 and to the effects of the storm. Over this period , Mississippi’s gross state product rose from $64.3 billion in 2000 to $81.3 billion in 2005, increasing annually at an average rate of 2% after adjustment for inflation. The state’s per capita income grew concomitantly from $21,000 to $24,912. Over the 2006-2011 period, an average annual growth rate of employment of just over 1% is projected. The average annual increase in gross state product will approach 3%.
Eighty percent of wage and salary employment in Mississippi is in service-providing industries, with the remaining 20% in the goods-producing industries of manufacturing, construction and natural resources/mining. But despite the dominance of services, Hill said goods-producing industries, and manufacturing in particular, are crucial to the state’s economy.
“In the U.S. as a whole, manufacturing provides 11% of total jobs, but in Mississippi the figure is 16%,” she said. “Manufacturing also sustains many of the state’s service jobs in transportation, business services, finance and agriculture. Within manufacturing, the percentage of employees in furniture and in lumber and wood products is more than twice the corresponding percentage for the U.S. These industries, along with food products, account for 38% of manufacturing employment, versus 18% for the U.S. as a whole. Transportation equipment (including both shipbuilding and automobile production), electronic equipment, industrial machinery and plastics and rubber also account for over a third of manufacturing here.”
Two other sectors employ 15% or more of workers: retail/wholesale trade (16%) and government (22%). The leisure and hospitality sector now provides 10% of total employment, down from 11% in 2004; health and education services, 11%; and professional and business services, 8%.
Total employment dropped slightly over the 2000-2005 period, but is projected to grow at an average annual rate of about 1.1% over the 2006-2011 period, led by increases in construction, business and other services and leisure and hospitality.
Contact MBJ contributing writer Becky Gillette at email@example.com.
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