NPR has been reporting on pockets of strength in the U.S. economy in a series called "Looking Up."Economists at the University of Nebraska-Lincoln are also seeing signs of strength at the state level, from a new economic index that judges where the Nebraska economy is headed in the future. Grant Gerlock learned more about how the index called the Leading Economic Indicator for Nebraska works in an interview with Dr. Eric Thompson, Director of UNL's Bureau of Business Research.
GRANT GERLOCK, NET NEWS: So the word "leading" here is kind of a play on words, right? It means that it's a report that's looking ahead.
ERIC THOMPSON, UNL BUREAU OF BUSINESS RESEARCH: That's right. We're not trying to lead anyone, but we are trying to describe what the economy will look like about a half year, about six months in the future. Will the economy be growing? And if it is growing, is it going to be growing strongly or at a more moderate pace?
GERLOCK: A few months in, how does Nebraska's economy look according to the LEI, the Leading Economic Indicator?
THOMPSON: The Leading Economic Indicator indicates that by the middle of 2012, the Nebraska economy will growing at a solid, moderate rate suggesting significant opportunities, significant expansion, but not a robustly growing economy.
GERLOCK: What do you expect to be driving that?
THOMPSON: Nebraska is very much an export-oriented state. So there has been, over the last few months, a decline in the U.S. dollar, which should allow our economy and our export economy to expand. Another key part of the Nebraska economy, of course, is the manufacturing sector. Recent indications suggest that our manufacturing sector is expanding as well. So that, in combination with perhaps a bit better information in terms of housing, starts. We also see some indications that airline traffic is picking up. All these things suggest that economic growth is underway and by the middle of the year the economy will be growing solidly at a moderate pace.
GERLOCK: You mentioned a couple things that I noticed when I was looking at the report that I wasn't really expecting. You follow the value of the dollar, which is something you might expect in an economic report, but airline passengers, why that? And how do you choose which things to follow for your calculations and what gives the most accurate picture for where the economy is headed?
THOMPSON: We try to find indicators that either speak broadly about where the economy is going or that focus on a very important specific sector, such as the construction industry. And we choose sectors that logically and through statistical testing you would expect to make a prediction of what the economy will look like five or six months down the road.
So with airline passengers, a lot of business travel is to make agreements, to decide to continue in a business arrangement or to start a business arrangement with a client. So as you see business travel picking up, that suggests more agreements are being made and therefore, 5 or 6 months down the road, workers will have to be doing whatever work was agreed to during those business meetings. That's why changes in trends in terms of airline passengers is a good predictor of what the economy will look like six months in the future.
GERLOCK: If you follow the news, you hear a lot of numbers coming from this or that index: the Case Schiller Index on home prices or the Consumer Price Index. And in Nebraska there's the Rural Mainstreet Index at Creighton University in Omaha. How does the Leading Economic Indicator fit in with those? How is it different?
THOMPSON: Well, like the U.S. Leading Economic Indicator , the Leading Economic Indicator in Nebraska focuses on a larger basket of indicators. Some of the business surveys, purchasing manager surveys and so forth, tend to focus on the manufacturing sector, which is, especially cyclically speaking, a very important part of the economy. And we look at that sector as well, but we felt it was important to include a broader set of indicators, such as airline passengers, such as exchange rate, that capture a larger part of the economy. Again, purchasing manager surveys are focused more on manufacturing. Case Schiller, obviously, is focused on the housing sector. We look at those things too, but we focus on a larger set.
GERLOCK: I'd like to ask you about gas prices. Right now, the predictions are that they could rise to $4 a gallon or above by the summer. At the same time, there are predictions that unemployment could drop down to 8 percent, which would be low for recent years. Are those two predictions at odds?
THOMPSON: They can be. The consumers, in particular in the United States, are very sensitive as you know to fuel prices. So higher fuel prices could suppress consumer activity, which can affect obviously the retail sector, the service sector and ultimately our manufacturing sector. But the relationship also works the other way around, as well. The strength of the economy, what's going on with the unemployment rate can also affect oil prices, because ultimately oil prices, which have a big influence on gas prices, are based on expectations about the economy, when you think about how those prices are set in the global market. So if there's stronger job growth, falling unemployment, that will make energy traders more inclined to expect a higher oil price in the future. So while higher oil prices may reduce economic growth, expectations of better economic growth will tend to raise oil prices. So it's not clear that those two things are at odds. They both have an effect on each other.
GERLOCK: So the Leading Economic Indicator, six months down the line you're looking for modest growth?
THOMPSON: Moderate solid growth in the Nebraska economy. Obviously robust growth would be more welcome, but right now we're not forecasting a robust growth in the Nebraska economy.
GERLOCK: What's holding things back? What would need to happen for there to be that robust growth?
THOMPSON: Well, the key thing would be rapid improvement in the housing sector, rapid improvement in construction activity, and getting our construction activity back toward more historically normal levels. There was substantial overbuilding during the last decade and it's likely that it's just going to take a few more years to work off the inventory that we've built up and create a need for substantially higher levels of home-building.
GERLOCK: Thanks very much.
THOMPSON: You're welcome.