St. Louis Federal Reserve economist says U.S. economy is in ‘pretty good place’

An economist with the Federal Reserve Bank of St. Louis says a recession is coming, but it hasn’t manifested yet. Big picture-wise, in fact, the economy is in a pretty good place.

“We’re in the midst of the longest U.S. economic expansion in history, so we know [a recession] will come at some point,” business economist Kevin Kliesen told a gathering of about 200 business leaders Monday (Nov. 4) at Crystal Bridges Museum of American Art in Bentonville. “I don’t think we’re in a recession now. I just don’t see from the data that we’ll be in one three or six months from now, but who knows.

“Typically those occur because of things we don’t anticipate or can’t forecast very well. It may be the case that this trade disruption we are seeing might be large enough cumulatively to drive the economy into recession. At this point, that doesn’t appear to be the case.”

Kliesen was one of three presenters at Monday’s economic briefing hosted by the Little Rock branch of the Federal Reserve Bank of St Louis and Heartland Forward, a research institute established recently and based in Bentonville. Other speakers included Charles Gascon, a regional economist with the Federal Reserve Bank of St. Louis, and Ross DeVol, president and CEO of Heartland Forward. They gave updates on economic conditions and the outlook for the region and nation, and shared ideas for improving economic growth.

Kliesen said GDP growth in the third quarter fell below 2% and a similar reading is expected in the fourth quarter this year.

“The Fed’s easing policy is clearly designed to extend this economic expansion we’re in,” he said. “Time will tell if that plays out as it did in 1998 and 1999.”

Retailers are expecting strong sales during the holidays and the housing market is rebounding. He also pointed out the strong labor market, with unemployment rates posting 50-year lows in the U.S.

“The consumer is spending well and actually saving well,” he said. “I don’t really worry about consumers leveraging or getting out of kilter in terms of taking on too much debt at this point.”

On the flip side, manufacturing and business investment are weak, Kliesen said.

“Businesses seem to have taken on a lot of debt,” he said. “So if the economy slows, they’re going to get into a situation where they’re in a vice, where their profits will be squeezed and their costs they have to meet because of debt service have to compete against that.”

Of the long list of factors affecting the economy, Kliesen told the audience that trade disputes with China are perceived as the dominant risk to the economy through 2020.

“I think we have settled down into — at least from a national standpoint — an economy that is growing pretty close to its potential,” Kliesen said. “It’s relatively slow, but if we can resolve some of these uncertainties, we can actually see faster growth going forward.”

In his remarks, DeVol put the probability of a recession at 35%.

“That’s what I told a group of private equity investors a couple of weeks ago and I’m sticking to it,” he said.

DeVol, who joined the Walton Family Foundation’s Walton Fellows Program in the fall of 2017 and is a former chief research officer at the Milken Institute, is now leading Heartland Forward, a “think and do tank” in Bentonville that will focus its research on economic renewal in middle America.

He said entrepreneurs and innovation are vital to a dynamic economy, specifically young firms — young being five years or less of doing business.

“Those firms create jobs in the U.S.,” he said. “Many demographers like to say that demography is destiny. Our research demonstrates that creating your own firms determines your destiny.”

In a recent analysis by Heartland Forward researchers of 379 metropolitan statistical areas (MSAs) in the U.S., Northwest Arkansas is ranked No. 17.

DeVol said a key takeaway from the research — which he reiterated Monday — is MSAs with knowledge-based economies perform better than those that have yet to make much-needed investments in technology, education, entrepreneurship and commercialization.

Q&A SESSION
Monday’s two-hour program concluded with a Q&A session for the three economists.

Cam Patterson, Chancellor for the University of Arkansas for Medical Sciences in Little Rock, asked a question about population migration trends toward the American Heartland from the coasts, even though the Heartland, on the whole, seems deficient in technological resources.

DeVol said the affordability of housing in the Heartland is becoming more attractive to Millennials.

“In many locations, especially on the West Coast but even the East Coast, you are starting to see housing prices and even rental prices get so far advanced,” he said. “In San Francisco, a 1,200-square-foot apartment, or any place you’d want your kids to live in, it rents for $6,000 or $7,000 a month. So, many young people who don’t view themselves as being in the money are looking to get a job, basically at equal compensation, and [still] be able to afford a house with a backyard. We’re starting to see many people make that choice. It’s showing up in various places in the Heartland — Nashville, Austin and Dallas. It’s starting to spread a bit more broadly but it’s an early trend.”

An administrator in the liberal arts department from the University of Arkansas at Fort Smith asked a question expressing a concern she hears from students — what can they do with their degrees, and how might they be encouraged that there will be a place for them in today’s economy?

“One of the challenges you have with STEM workers is they are typically not the most advanced in terms of communications skills,” DeVol said. “And many times they need to be partnered with others who have broader bases. So you’ll find liberal arts people that are actually working in some of these tech firms. They may have acquired technical skills later, but they are benefitting from the interaction of working with the technology and science workforce.”

Mary Ann Greenwood, a retired financial advisor in Fayetteville, asked a question about potential growth in east and northeast Arkansas, areas that are not growing as rapidly as Northwest Arkansas or other MSAs in the region.

DeVol and Gascon said there are economic indicators that things are improving in the northeast part of the state.

“We hear good reports all the time from our Memphis branch about [economic] activity in northeast Arkansas,” Gascon said. “It seems to be the case that the core cities are seeing significant development in inward migration. Attracting people particularly from around that area. They are consolidating more into the core cities.”

Reed Greenwood, Mary Ann’s husband and a retired dean of the College of Education and Health Professions at the University of Arkansas, asked the panelists about an education issue.

“When we were undergraduates in the middle of the last century at the University of Arkansas, the state picked up almost all the cost of our education,” Greenwood asked. “That burden is now placed on students and their families. What public policy changes do you all see need to be made to help that, and other kinds of economic growth we’d like to see?”

DeVol answered that, unfortunately, a lot of spending at the state level is going towards incarceration, a lot of it related to drugs.

“I think one of the things we could do is not have mandatory prison sentences for some minor drug offenses,” he said. “The worst that could happen if you go into an institution, you’re going to come out worse than you were than when you went in. We need to focus more of our educational resources on educating [and] training people that are incarcerated.

“Now, a lot of people in the room aren’t going to like my next comment…public universities need to become more efficient. If you look at productivity measures, the only one that’s done worse than healthcare is public universities. It’s hard to deliver high-quality education. You need a lot of faculty. But if you look at where the dollars have gone in higher education, they are increasingly going to administrative and less to faculty. I think that’s an area public universities themselves can fix.”