Idaho’s economic growth has been disappointingly slow since the recession ended, however, the last half of 2014 saw it pick up a bit. Many economists expect to see increased growth. The U.S. economy is primed, with consumption and investment expected to surge and government to remain neutral. Trade – partly because of a weakening global economy and partly because of a surge in the value of the dollar is predicted to be the only thing that slows the country’s recovery.
Fewer Exports, More Imports
The U.S. may find it harder to sell its goods and services as most of the world’s economies are going through a rough patch. Europe’s economy is at a standstill, and Japan is in a recession with a projected economic growth rate of less than 1 percent this year. The fastest-growing economies of the past decade – Brazil, Russia, India and China collectively known as the “BRIC” – are expected to grow at their slowest pace in six years. China’s growth rate is expected to fall below 7 percent – still fast relative to most places but far below the double-digit economic growth it enjoyed in recent years. Decreased demand from China for iron and other commodities and falling commodity prices have already knocked Brazil for a loop. Russia is teetering on the edge of recession, and the fall in oil prices may drag it down. China’s slowdown is likely to impact other Asian countries. Petroleum-producing countries in Africa and Latin America are hurt by the fall in oil prices since last summer.
The dollar rose in value against most currencies in recent months and should continue to rise as the U.S. economy grows faster than most countries and the Federal Reserve ends quantitative easing. The broad trade-weighted exchange rate for the dollar increased 10.1 percent between June and January to its highest level since early 2009. A stronger dollar makes American products and services more expensive for foreigners and makes foreign products and services less expensive for Americans. American consumers now can see some prices dropping as imports become less expensive, and Americans are getting more from their money when traveling abroad. American manufacturers are also finding it harder to sell abroad, facing downward pressure on their prices because of imports, and the American travel industry is likely to host fewer foreigners. The trade deficit – the gap between imports and exports – will probably grow considerably this year.
Idaho’s manufacturing, logging and agricultural sectors that export abroad have run into another problem in the last seven months. A labor dispute among the 70 shipping companies at West Coast ports and the longshoremen’s union severely slowed outbound shipments. They had been operating without a contract since July. The shipping companies blamed the bottleneck on deliberate work slowdowns by labor while the union pointed to bad management decisions about on-dock transportation and reduction in night shifts. In any case, there was a growing backlog of cargo ships waiting to be unloaded. Products that normally took two or three days to clear the ports were taking a month or two. The labor dispute ended in mid-February, but the backlog may take a few months to clear. Idaho exports about $1.5 billion in agricultural products a year, mostly through the West Coast ports. The Idaho potato industry reported lost loads, canceled orders and product returned to Idaho because of the slowdown. Idaho exporters are especially concerned that some customers may switch to other suppliers and that long-term relationships may have frayed because of the bottleneck.
In December, frozen French fries had to be shipped via air to Japan, where McDonald’s had to ration fries due to the delivery delay. Japan imported about $270 million in frozen potato products from the U.S. in 2013. Simplot and ConAgra cut hours at their processing plants because of the port congestion. For agricultural and food products that can spoil, the slowdown may mean the inability to sell the products. In addition, some Idaho retailers and wholesalers have experienced difficulty getting imported products in a timely fashion. Some Idaho companies are using air to get their products to overseas customers or sending them to East Coast and Mississippi River ports, which increases their costs. Some fruit and meat exporters have been forced to pay for cold storage, further increasing their cost. Exporters affected by the slowdown fear that they will lose customers that they might not be able to regain when the bottleneck is eliminated.
Gov. C.L. “Butch Otter will lead a trade mission to Peru and Mexico in May in an effort to boost Idaho exports. Peru has been one of the fastest growing Latin American economies for the past 10 years and is an important market for agricultural products, mining equipment, construction materials and equipment, pet products and telecommunications equipment. Mexico is the United State’s second largest trading partner. Its leading purchases include telecommunications equipment, energy, Internet and information technology services, medical devices, building materials, transportation equipment, agricultural equipment and food and agricultural products.
The Good News
The dollar’s growing strength is one factor contributing to the drop in oil prices. More important factors were an increase in global supply and the fall in global demand as the economies of China, Europe, Japan and Latin America slowed. In the last couple of years, the U.S. and Canada began producing larger quantities of oil, Russia started producing at its highest levels since the Soviet Era and Iraq now is producing at its highest level since the 1980s. Saudi Arabia grew tired of cutting its own oil production in order to prop up prices enjoyed by other countries, so it decided to increase production in November. Oil prices fell from $110 per barrel in June to $48 per barrel by the end of January. Lower oil prices reduce transportation and energy costs for farmers, manufacturers, airlines, trucking companies and other businesses. The fall in gasoline prices from $3.70 a gallon at the end of June to $2 at the beginning of February gives consumers extra cash to spend elsewhere, which already appears to be boosting spending at stores and restaurants. Reduced fuel costs especially benefit Idaho’s rural residents and low-income families.
The labor market showed major improvement in 2014. The U.S. seasonally adjusted unemployment rate fell from 6.7 percent in December 2013 to 5.6 percent in December 2014 while Idaho’s rate fell from 5.6 percent to 3.7 percent. Job growth accelerated last year. U.S. employers added 2.95 million nonfarm payroll jobs after adding 2.28 million in 2013, and Idaho employers added 9,500 jobs after adding 7,500 jobs the year before.
Idaho consumers, like their counterparts across the United States, are in the best position in years to spend. Consumer confidence is at its highest level in eight years, household balance sheets have improved, consumer wealth has increased as home values have risen and the stock market soared and gas prices fell. Consumers have a lot of pent-up demand since most have been cautious about spending since the recession began in December 2007. Since consumer consumption spending drives 70 percent of the economy, it is great news for retail and service businesses and their suppliers. Idaho’s taxable sales were 7.7 percent higher in the third quarter of 2014 than in the same quarter the year before, according to the Idaho Tax Commission.
More confident, better-heeled consumers should also boost housing starts. Mortgage rates may rise slightly if the Federal Reserve ends quantitative easing, but will still remain low. Mortgage underwriting requirements have become a little less tight, allowing more families to buy. Down payments for Fannie Mae and Freddie Mac mortgages have been reduced from 5 percent to 3 percent for creditworthy first-time home buyers. According to the Federal Housing Finance Agency, Idaho housing prices rose 13.5 percent between 2013 and 2014. Home price gains have slowed in recent months after the big rebound following the financial crisis. Stable, yet rising, prices give buyers more confidence that they are making a good investment and keeps homes affordable. Housing starts nationally rose above one million in 2014 but still were lower than any year between 1959 when the data was first collected and 2007. Idaho’s housing starts rose 6.9 percent in 2014 but remained below their prerecession levels.
An increase in national housing starts would help Idaho’s timber industry, stone quarries, landscape nurseries and manufacturers of cabinets, furniture, household appliances and construction equipment. Those industries employed about 10,700 people in Idaho last year compared with 14,500 in 2006. A significant increase in housing starts can make up for the lower demand from abroad for lumber and wood products. Wood product manufacturers also are benefiting from a drop in saw log prices caused by reduced demand from Asia.
With economic activity picking up, business investment is likely to rise. After most recessions, business investment increases significantly, helping to drive expansion. This time, it did not, but 2015 could finally be the year that businesses increase spending on plants and equipment. Greater optimism, a record amount of cash that corporations are sitting on, slight increases in credit availability and relatively low interest rates will contribute to the momentum. In addition, as the labor market tightens and wages rise, businesses will have more motivation to purchase productivity enhancing equipment. Industrial capacity utilization has also risen close to the 80 percent level that normally leads to expansion. American factories were running at 79.3 percent capacity utilization in December, the highest level since April 2008, according to the Federal Reserve Board of Governors.
Harder to Find Qualified Workers
Competition for workers heated up in 2014 and as unemployment fell, job openings increased and baby boomers began retiring at the rate of 9,800 per day in the U.S. and 50 per day in Idaho. Many employers report difficulty finding qualified workers, and those problems are likely to grow this year as the labor market continues to tighten. With workers more secure about being able to find new jobs, they are also more willing to quit their jobs, and turnover rates are likely to rise. Many employers are trying to reduce turnover by providing promotional opportunities, increasing training and development opportunities and adding nonmonetary benefits like workplace flexibility.
For jobs that businesses often rely on migrants to fill, there is more competition for workers. Fewer workers are coming from Mexico than before the recession. The number of other Central American migrants has increased, but that only makes up for a small part of the former flow from Mexico. For the first time in more than 60 years, more non-Mexicans than Mexicans were apprehended by U.S. Border Patrol at checkpoints in 2014, according to the Pew Research Center. Approximately 257,000 non-Mexicans were apprehended by the U.S. Border Patrol in 2014 compared to about 229,000 Mexicans. 2014 was the first year that more than 250,000 non-Mexicans were apprehended. Mexican apprehensions before 2007 usually numbered over 1 million. An improved economy in Mexico, limited job opportunities in the U.S., tougher border security and a lower Mexican birth rate have contributed to the decline in Mexicans coming to the U.S. for work since 2007. At the same time, more Central Americans have been coming to the U.S. Last year, there was a surge in unaccompanied child migrants from El Salvador, Guatemala and Honduras.
Kathryn.Tacke@labor.idaho.gov, regional economist
(208) 799-5000 ext. 3984