Professor: Regional economy faring well

Keller

The Great Plains economy remains strong despite national jitters, according to a University of South Dakota business professor.

Mike Keller, dean of the Beacom School of Business, said he doesnt foresee an immediate end to the national recession. Those fears have been fueled by the plummeting stock market, debt limit debate, downgrade of the nations credit rating and high unemployment.

Everybody is nervous. I think, basically, its a mood of uncertainty, and of course, uncertainty is usually translated into a lack of action, he said. I think that businesses are not investing, banks are not lending and employers are not employing people because everyone is hesitating.

However, he sees continued good times for rural states such as South Dakota and Nebraska.

In South Dakota and the surrounding areas, the economy is dominated by agriculture. We have done very well. The agriculture segment has done great the last three or four years, he said.

There is no recession in ag. There is a boom. Grain prices are way up, produce is up. The agriculture-industrial complex has done quite well. People will buy (food). We dont expect change. As far as a double dip (recession), I dont think South Dakota will be thrust into it.

Keller sees growing global demand for American foodstuffs, with a spin-off impact on farm machinery and input materials.

The middle class is developing in other countries, and the demand for our farm products is going up, not down, he said. There is more interest in high-quality foods, more meat for protein. These countries can afford more protein, and we grow protein well.

The demand for American food is not limited to one part of the world, Keller said.

Brazil is a big economy and a big population center. Russia is another economy that is gaining, he said. Millions of people are starting to eat more food that we export. In the long term, we are doing that (food production) better than anybody else.

North Dakota enjoys an oil boom in addition to its strong agriculture, and South Dakota and Nebraska are national leaders in ethanol and other biofuels, Keller said.

Right now, energy policy and environmental policy go hand in hand, and politicians are looking to invest in alternative energy, he said. But more needs to made (of opportunities) in the private sector. There is a lot of research being done, and there are people with ideas and investments.

Besides its agriculture boom, South Dakotas economy has enjoyed a strong health care industry, Keller said.

When it comes to health issues, people will spend on that regardless of the economy, he said. People are not going to cut corners when it comes to health care. The demand always seems to go up.

The region also escaped the housing bubble that has placed a drag on other parts of the country, Keller said.

Very few of our banks were overextended or over-leveraged, he said. They werent chasing around, looking for borrowers who werent qualified.

South Dakota has also kept its jobless rate under 5 percent, or about half the national average, Keller said.

However, that doesnt mean the state has been without problems, he said. The manufacturing sector took a hit at the height of the recession, with Yankton holding one of the states highest jobless rates at more than 7 percent.

Yankton is a little more industrial than most of South Dakota and was one of the worst affected (by the economic downturn), he said.

Yankton has made gains in its manufacturing with the recent expansion of businesses, but manufacturing continues to struggle nationally, Keller said.

Most of the manufacturing segments in the country and the world have significantly underutilized capacity. I would guess that we have in the neighborhood of 30 percent unused capacity in many industries, he said. We have to see demand increase. For the industry to really grow, you need to add jobs and new facilities, and to buy new equipment.

Riding Out The Storm

South Dakota and Nebraska may be enjoying a relatively strong economy, but those states dont exist in a vacuum, Keller said. They are ultimately affected by the national and global turmoil.

If the economy is going to bounce back, the Europeans need to get a handle on things, he said. And the U.S. government is going to have to come up with some sort of clear plan to address the deficit and address the job growth idea. But there is political gridlock, which adds uncertainty both in Europe and America.

Keller fears that politicians lack the courage to take bold action or the will to reach a compromise.

I dont see any signs of people coming to an agreement on a clear plan, he said. I hope we dont dig in and wait for an election. Its a real waste of 15 months. A lot of times, you never get that (lost opportunity) back.

The United States needs to seize the moment, Keller said.

Would (a delay) kill us? Probably not, he said. But wouldnt it be better if we started getting things (back on track)? I think that waiting means lost opportunity, although its probably not a death knell.

Keller wasnt surprised by the stalemate over the nations debt limit.

I predicted early and often that they would dilly-dally around and that it would come up to the last minute. What they came up with wasnt substantial and basically kicked the can, he said.

They will postpone (action) until the next time that the ceiling comes up. Its a problem with politics and not a problem of economics, which in itself is solvable.

Europe has seen even greater economic chaos with its huge collective economy, Keller said. He looks for the devaluation of currency and other moves that will add to the anxiety.

Meanwhile, the American stock market undergoes huge swings, the USD dean said.

People sit on their hands, waiting to see what happens, he said. Theyre worried about the bubble bursting with change.

Parties with wealth are steering clear of risky investments and holding on to incredible amounts of cash, Keller said.

They are now talking about trillions thats starting with a t of dollars they are sitting on, he said. Formerly, we had 95 percent (of wealth) in portfolios of stocks and bonds, and 5 percent in cash. Now, we are finding a lot of wealthy people sitting on 20 to 25 percent of their investments in cash.

Keller anticipates continued wild swings in the stock market as uncertainty reigns, pushing money toward safe investments with little return.

As far as markets, (investors) are looking for direction. But there are wild gyrations. I dont see much change for two or three years, he said. (Investors) are moving into AAA government bonds and safe things like cash, (certificates of deposit) and the bank savings accounts.

Consumer spending has tanked as the national unemployment rate remains above 9 percent and people fear for their jobs or are living on much smaller paychecks, Keller said.

We wont have strong recovery until unemployment drops. If its 10 percent unemployment, people arent confident until the figure become lower, he said. There is no way we are going to grow the economy and boost production until we get unemployment below 5 percent.

Where Do We Go From Here?

Politicians remain polarized on the idea of another stimulus, Keller said.

They are talking about the short-term stimulus versus no stimulus and a cut in government spending that will produce some sort of growth. There is nowhere in the middle, he said.

Stimulus projects could benefit areas such as infrastructure, but any government stimulus produces only short-term results, Keller said.

Its not the government that produces growth. Ultimately, the private sector has to produce, he said. We have to find segments of the economy that Americans can rally around, where we can generate a bunch of new jobs. They have to produce something that people want to buy. We have got to get corporations to invest their cash.

The nation also faces tough questions about tackling the deficit, Keller said. Congress could opt for some tax increases along with broad-based budget cuts, he said. However, those cuts would affect popular programs such as education, health care, farm programs, federal disaster aid and military spending.

As far as cuts, its a matter of whose ox gets gored the most, he said.

The United States faces critical decisions on defense spending, particularly with two wars still ongoing as the nation approaches the 10th anniversary of 9/11, Keller said.

It may be money well spent (on wars). But instead of spending into the trillions (of dollars) in Iraq and Afghanistan, what if it would go into jobs in America? he asked. Instead of all that money spent on troops and equipment, we invested it in infrastructure, it would be a considerably different world.

While South Dakota is not immune from the recession, it also avoids the wild economic swings often found elsewhere in the nation, Keller said.

In many parts of the country, they are going from boom to bust, he said. We dont have many booms when the rest of the nation is booming, but we also arent caught in a lot of busts. We had one gold rush (in the Black Hills), and that was it.

Despite the gloom and doom of some naysayers, Keller believes the nation will find a solution to its economic woes.

I am generally pretty optimistic that this will work out, he said. For our purposes, we put our faith in (believing) that it will.

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