Economic Trends 
July 2016 | Creighton Institute for Economic Inquiry  
Welcome to our July report covering results from Creighton's two June economic surveys. Creighton's monthly survey of supply managers and procurement experts in nine Mid-America states indicates the economic growth was slightly positive for manufacturing with stabilizing economic conditions but with job losses. Creighton's monthly survey of bank CEOs in rural areas of 10 states, on the other hand, points to economic weakness for the month with almost record low agriculture equipment sales indices and declining farmland prices.     
Professor Ernie Goss


Creighton University
Jack MacAllister Chair in Regional Economics

From the Desk of Ernie Goss
Taxpayers Need to Shine Light on Solar Energy
 
In 1982, as a graduate research student at the Department of Energy's (DOE) Oak Ridge National Laboratory, I worked on solar energy projects. At the time, the goal was to replace fossil fuels with solar energy in the production of electricity.

As an infant industry, it was argued that all solar needed was short-term taxpayer subsidies to become competitive with its elder rivals. However after 34 years and massive taxpayer subsidies, the industry still cannot compete cost-wise with rival energy sources in producing electricity.
 
The latest DOE data show 2013 taxpayers showered solar energy with $4.4 billion in subsidies for a mere 19 million megawatt hours (MWH) of electricity production, or one-half of one percent of total electricity usage for the year. That works out to $23 per MWH when the average retail price for electricity was only $13 per MWH. In addition to these subsidies, the federal government invested in scores of failed solar energy firms including $535 million in Solendra, $1.5 billion in Sun Edison, and even $2.7 billion in Spanish solar energy giant, Agengoa.
 
Despite the subsidies and excessive costs per MWH, advocates argue solar energy remains an infant industry that needs taxpayer funds and regulatory coddling. If the goal is to reduce CO2 emissions from coal-fired electricity generation, a better approach is to introduce a carbon tax taking the decision making out of the hands of market meddling politicians, and putting it into the hands of individuals and investors with "skin in the game." 

Read more articles on Professor Goss' blog Economic Trends.
Mid-America & Rural Mainstreet
Indicators Graph
 

Mid-America Region
Business Conditions Index Slumps:
One in Six Firms Expect Second Half Layoffs
View full report.
 
June Business Conditions
June 2016 MId-America Region Survey

June survey results at a glance:
  • For a fifth straight month, the overall index remained above growth neutral.
  • Manufacturing job losses were recorded for the month.
  • For the second half of 2016, one in six firms expects layoffs while one in four anticipates additional hiring.
  • Inflation gauge moved higher while export orders plummeted.
  • Kansas, which exports only 0.3% of gross domestic product to Great Britain, is the most susceptible to British economic turmoil among the nine states in the region
Rural Mainstreet 
Economy Remains Weak for June:
Bankers Tighten Farm Loans
 
June survey results at a glance:
  • For a tenth straight month, the Rural Mainstreet Index fell below growth neutral.
  • Farmland prices remained below growth neutral for the 31st straight month.
  • Due to the weak agriculture economy, 73.5% of bankers increased collateral requirements, half boosted interest rates, and 35.3% rejected a higher percentage of farm loans.
  • Rural Mainstreet businesses boosted hiring for the month.
The Outlook
 
Professor Goss' Forecast - July 2016:  
  • The Federal Reserve's meeting on July 26-27 will be a "non-event." No rate change and not much guidance except to say, "Any change will be data dependent." Let's hope they are data dependent!
  • U.S. inflationary pressures will continue to rise gently for the rest of 2016.
  • U.S. mortgage rates will fall to their lowest levels in three decades in the weeks ahead.
Federal Reserve (June 2016)
  • "The Fed cut its forecast for U.S. economic growth in 2016 to 2%, down from 2.2% earlier. This is the second time this year the Fed is reducing its expectations for U.S. economic growth. The Fed also slightly decreased its projection for economic growth in 2017. The Fed says it 'expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.'
  • The central bank bumped up its estimate for inflation for this year to 1.4% after it was slashed in March to 1.2%. Inflation has been very low in recent years and its slow pace is a key reason holding back the Fed from raising rates further.
Opportunities
  • U.S. home prices rose by 5.1% between April 2015 and April 2016. This marked the sixth straight month that growth has exceeded five percent.
  • The average 30-year fixed mortgage averaged 3.48% for the week ending June 30, down from 3.56% the previous week.
  • U.S. companies added a massive 287,000 jobs in June, well above the expected 180,000.
Bad News
  • Between May 2015 and 2016, the core CPI which excludes food and energy, rose by 2.2% and has risen above 2.0% (the Fed's supposed target) for 7 straight months.
  • The U.S. trade deficit climbed by $41.1 billion in May compared to April's $37.5 billion. Exports declined by 0.2% and imports jumped by 1.6%.
Calculator Newspaper - image by Nick Benjaminsz
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9-State  
Supply Manager Report
 

* Arkansas

* Iowa

* Kansas

* Minnesota

* Missouri  

* Nebraska

* North Dakota  

* Oklahoma

* South Dakota

 

 Read state-by-state, six-month projections by supply managers from nine states. Participants were surveyed about current economic conditions in their communities.  



Statistic of the Month
  
1.367%

The yield
(effective interest rate) on the 10-year U.S. Treasury bond fell to its lowest level ever last week to 1.367%.
Why? Three reasons:  

  1. Ultra-low and even negative yields on competing bonds,
  2. Declining inflationary pressures, and
  3. Safe haven buying resulting from growing global economic uncertainty (Brexit). 

Goss Eggs

Goss Eggs
 
Recent Dumb  
Economic Moves 

The Venezuelan government continues to enforce price and currency controls even with empty shelves at grocery stores. Coca-Cola has ceased cola production in this oil rich nation due to sugar shortages. Prices set by politicians below the equilibrium market price inevitability produce two outcomes: shortages and underground markets. The laws of supply and demand are just that, laws, not good ideas.

 
 
What to Watch

Image - Glasses Newspaper

CPI:
On July 15 and August 16, the Bureau of Labor Statistics releases the consumer price index (CPI) for June and July, respectively. Keep an eye on the core CPI (excludes food and energy).
The year-over-year growth has been above the Fed target of 2.0% for the past 7 months.
_ _ _

GDP:
On July 29, BEA releases its advance estimate of quarter 2 U.S. GDP (gross domestic product). Another annualized reading below 1.5% will be a bearish economic signal. GDP growth over 2.5% will be a bullish signal.
_ _ _

The Jobs Report:  
On Aug. 5, the Bureau of Labor Statistics will release the July jobs report. Another very weak report (i.e. less than 100,000 jobs) will encourage the Federal Reserve to forego raising rates until the end of 2016.
  



Ernest Goss, Ph.D. � Institute for Economic Inquiry

Creighton University � 2500 California Plaza � Omaha NE � 68178