Deere economist: Uncertainty is the new normal for economy


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Originally Posted Online: Feb. 19, 2013, 8:52 pm
Last Updated: Feb. 20, 2013, 2:07 pm
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By Jonathan Turner, jturner@qconline.com

DAVENPORT -- The one economic element you can be sure of is uncertainty, the chief economist for Deere & Co. said in a 2013 economic forecastTuesday afternoon.

"Uncertainty is going to be the new norm from now on," J.B. Penn said in his third annual presentation for the Quad Cities Chamber of Commerce.

The economic recovery since the 2008-09 recession is still fragile, he said, especially in the United States

"Policy uncertainty is the No. 1 problem," he said, noting it's "a real drag on the domestic economy."

Dr. Penn -- who has been with Deere since 2006, is a former under-secretary for the U.S. Department of Agriculture and has a Ph.D. in agricultural economics -- said conflicting news on economic growth and the partisan paralysis in Washington, D.C., are hurting the recovery.


"It's very confusing; we get mixed indicators every single day," he said, noting the Dow Jones Industrial Average is moving toward all-time highs while the gross domestic product contracted in the fourth quarter of 2012.

The "dysfunctional" U.S. government -- with its reliance on borrowing 40 percent of every dollar in new spending -- is facing three more major crises, Dr. Penn said:

-- March 1 is the effective date for $1.2 trillion in automatic spending cuts over the next 10 years -- half from defense -- including $85 billion this fiscal year.

-- March 27 is the expiration of the continuing resolution that allows the government to keep paying its bills without an approved new budget.

-- May 19 is the next deadline for the debt ceiling, which caps the amount the government can borrow.

Uncertainty in the tax code, looming spending cuts and the implementation of health care reform all affect businesses and consumers, Dr. Penn said. Individuals put off making home improvements and major purchases, such as homes and vehicles, and businesses delay hiring and capital investment.

"The art of diplomacy is finding the right balance (in spending cuts and revenue growth), to do as little damage as you can," he said.

He told the capacity crowd in the Putnam Museum's Giant Screen Theater that it was "amazing" -- given how many smart people work in Washington -- that a compromise can't be found.

"Despite the gloomy tone, I'm very optimistic," he said. "I think we're on the right path."

Compared to a 3 percent drop in GDP in 2009, the U.S. economy grew by 2 percent last year and is headed for similar growth this year, inching up 3 percent by 2015, Dr. Penn said. But he said large developing countries are growing faster, though -- China by 8.2 percent this year, India by 5.9 percent and Indonesia by 6.3 percent -- in part because of much greater success in exports.

While he expects improvements in housing starts and average home prices this year, Dr. Penn said more new jobs are needed to make a real dent in the unemployment rate, now at 7.9 percent nationally. He expects 167,000 new jobs to be added per month, but said there are 140,000 new entrants to the labor force each month on top of those already out of work.

At least 225,000 more jobs should be added monthly to make a difference, he said.

The Quad-Cities area has a 7.1 percent jobless rate, partially because of a farm economy that is "booming, doing exceptionally well." Midwest farmland values rose 16 percent in 2012, he said, and U.S. farm income hit an all-time record of $120 billion (not counting government subsidies), despite the drought.

This year's nationwide farm income should be about $110 billion, Dr. Penn said.

John Deere's profits hit a record in the last fiscal year, more than $3 billion, and first quarter net income leaped 22 percent on growing sales of farm machinery. In the quarter ending Jan. 31, Moline-based Deere earned a record $649.7 million, compared with $533 million a year earlier, on revenue of $7.42 billion. Deere expects 2013 net income of about $3.3 billion, slightly more than its earlier forecasts.

But Deere CEO Sam Allen has cautioned that "the near-term outlook is being tempered by uncertainties over fiscal, economic and trade issues that are undermining business confidence and restraining growth."

Responding Tuesday to a question on health care, Dr. Penn said new regulations not yet released for changes taking effect later this year and in 2014 will not save money for Deere.

"That's part of the big uncertainty," he said. "Until the regulations are written and we understand the impact, people are reluctant to do things. They put off hiring."

The Quad-Cities region was ranked 18th of the top 25 metro areas nationwide for high-tech employment growth in 2010-2011, according to Q-C Chamber CEO Tara Barney. The chamber targets industries such as defense, manufacturing and information technology to attract businesses here, she said.

"We're hearing more often now from businesses that intend to make significant investments as well as add jobs," she said.


















 



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