Haar to heart: The Economy—So How Are We Doing Now?

While many analysts agree that the recession is over, there is no consensus as to when the recovery will kick in. Put ten economists in a room and you’ll get thirteen different opinions.

Since there is very little “value-free” economic research, a great deal of data collection, analysis and reporting is partisan to the nth degree. Don’t expect economists at the AFL-CIO and those at the U.S. Chamber of Commerce to walk down the same path as they collect information, design their studies, analyze and report. Think prosecuting attorney vs. defense attorney and you’ll get the picture.

Since the Federal Reserve Board is among the “least non-credible institutions” in reporting on the state of the economy, let’s see what they say.

The Board’s Federal Open Market Committee met in November and reported that economic activity is picking up a bit and that labor market deterioration is abating. (Had the board taken field trips to Michigan, Rhode Island, California and South Carolina where unemployment hovers near double digits and auto-making and manufacturing in other sectors are stagnant, they might have tempered their report.)

The Fed also asserted that household spending appears to be expanding at a moderate rate, though constrained by a weak labor market, modest income growth, lower housing wealth and tight credit. Additionally, businesses are still cutting back on fixed investment (though at a slower pace) and remain reluctant to add to payrolls.

While discussion on economic recovery will heat up after the first of the year and intensify going into the November 2010 mid-term elections, it is not the macroeconomic-big picture issues that will determine the recovery—it’s shape, pace and depth—but the smaller, closer-to-home ones that confront state and local governments and economies. California and Florida vividly illustrate the point.

Even before the October 2008 financial meltdown, California was drowning in a self-made fiscal mess. It could not pay its bills and began issuing IOUs. State government had expanded faster than income or population, with spending growing 31 percent vs. a five-percent growth in population between 2003 and 2007. Real unemployment exceeds double digits; and added to its fiscal woes, excessively punitive business and environmental regulations have contributed to a loss of 400,000 manufacturing jobs between 2000 and 2007. Industrial employment has gravitated to Texas and Arizona instead. With powerful labor unions—especially government workers—wielding unbridled power and the middle class fleeing the state (even high tech workers are moving to Austin, Salt Lake City and other knowledge centers with better quality of life indicators), California’s fortunes will not improve significantly even after national economic recovery moves into full swing.

As for the Sunshine State, the situation is better but still grim. Florida’s economy is shrinking, with population in the nation’s 4th largest state dropping by more than 58,000 during the past year. Workers in construction, real estate and mortgage banking have seen their livelihoods disappear, victims of Ponzi-game thinking (and action) of “build-it-and-they-will-come.” With a third of all Florida jobs concentrated in construction and real estate at the height of the boom, and the state one of four (California, Arizona, Michigan and Nevada) accounting for 65 percent of troubled mortgages, recovery will be slow in coming. Add to that a $6 billion budget shortfall, high property and insurance taxes, a lack of affordable housing and severe deficiencies in transportation systems, education and social services, and the picture is not a pretty one. However, the bright side is that Florida is Florida, with a winning climate, steady influx of domestic and foreign tourists, a growing Latin media and entertainment sector, and emerging urban clusters in life sciences, information technology, health care and other knowledge-intensive industries on both coasts and in the center of the state.

State-level problems are not confined to fiscal, regulatory and management issues but also encompass major industrial changes that are reshaping (and creating upheaval) in the national economy—mainly the immutable shift from a manufacturing economy to a services one. Whole industries are moving offshore, by choice or necessity; other industries are disappearing; and the entire nature of work and employment is undergoing a paradigm shift. Technological innovation is producing continuous improvements in productivity, resulting in less labor input in both manufacturing and even services. Since redundant labor with one set of skills cannot readily transfer them to “new economy industries” (e.g., a lathe operator cannot assume a job writing software code), higher levels of unemployment and underemployment will characterize the post-recovery economy.

Essentially, the intractable structural problems that confront many states such as Michigan, Ohio, Pennsylvania, Missouri and Connecticut, in addition to California and Florida, and industries that were on the decline even before the recession (e.g., automotive, electrical machinery, steel, electronics, apparel, furniture) will remain long after the recovery is in full swing.

The recession may be over, as many observers assert; but as for recovery, we are not yet out of the woods (no reference to Tiger intended).

The state of the states and the state of declining industries pose challenges far greater than the 18-month deep recession from which we are emerging.

Jerry Haar is a professor of management and international business and an associate dean at FIU’s College of Business Administration. The opinions expressed in this column are the writer’s and do not necessarily reflect the views or opinions of either FIU or the College of Business Administration.

View all articles by Jerry Haar.

About Jerry Haar

Jerry Haar is a business professor at Florida International University and a Global Fellow at the Woodrow Wilson International Center for Scholars in Washington. He is also a research affiliate of the David Rockefeller Center of Latin American Studies at Harvard University.

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