Keynote: National Economic Trends and Aviation

Speaker

Janet Harrah, Executive Director, Outreach and Engagement, and Senior Director, Center for Economic Analysis and Development, Haile College of Business, Northern Kentucky University

Overview

The keynote set the stage for the event and discussion over the 2 days by providing an overview and insights into current economic trends globally and nationally and their impacts on aviation and airports. Janet Harrah’s presentation, “National Economic Trends and Aviation,” which accompanied her remarks, is available at https://www.trb.org/ACRP/ACRPInsightEventFinance.aspx.

Detailed Summary of the Keynote Discussion

Janet Harrah began by discussing short-term economic trends. She noted that the country is still in a pandemic economy and continuing to have supply-chain disruptions, worker shortages, and higher inflation levels. As for long-term economic trends, she stated there are three significant demographic realities. First, the rate of U.S. population growth is slowing. Second, the U.S. population is ageing. Third, the U.S. population is becoming more diverse. While those are national trends, they affect the 50 states in different ways. In addition to those demographics, Harrah discussed geopolitical challenges such as the war in Ukraine. She noted that it is important to remember that history shows that economic realignment always results in geopolitical realignment, and that is what the world is seeing.

Harrah stated that the bottom line is that last year, the economy was weak, with slower growth, increasing interest rates, and a banking crisis that was tying up capital. The question is what the Federal Reserve will do—will it continue to tighten and raise interest rates, or will inflation lessen, creating the possibility that the United States will avoid an economic recession?

Next, Harrah noted that bank closures show weaknesses in the global system. She noted that several banks failed, and First Republic is trying to shore up its financial position, but it is unclear if that will work. In Switzerland, Credit Suisse had to be purchased by UBS, and it is still unclear whether combining the two largest banks in the nation was wise. To put it into perspective, Harrah stated, the banks’ deposits were twice the size of Lehman Brothers’ when that bank failed in 2008.

Harrah noted there are mixed opinions on the possibility of a recession. While the United States has witnessed positive growth in gross domestic product (GDP) over the past 2 quarters, the Conference Board (a nonprofit business research organization) predicted a recession starting in the second quarter of 2023 and lasting about three quarters. Harrah also stated that Moody’s was predicting a “slowcession”—economic

growth that comes to a standstill but does not dip into contraction. In conclusion, Harrah stated, there is no consensus but continuing uncertainty.

Harrah added that the National Bureau of Economic Research is the official “recession scorekeeper” and will not declare a recession when there is such a strong labor market. She noted that all jobs lost during the pandemic had been recovered and that an additional 10 million jobs had been added. With job growth strong, but with many vacancies, Harrah stated that workers are generally in a stronger position. Nominal wages are up 54 percent, and real wages are up 15 percent (the difference due to inflation). Harrah noted this type of wage growth generally worries economists, as employers respond by raising salaries to attract workers, which fuels inflation.

Next, Harrah stated that during the pandemic and its aftermath, the media indicated there was a dramatic shift in labor force participation, a phenomenon it referred to as “the Great Resignation.” However, Harrah said, the data suggest otherwise. Workers under 24 are working less, likely because they and their parents do not want the younger workers employed while attending school. In contrast, however, those over 65 are working at significantly higher levels. All told, unemployment stands at 3.6 percent, with the Federal Reserve targeting an unemployment rate of 4.5 to 5.0 percent in order to get to a 2-percent inflation rate.

With that information in mind, Harrah then addressed the question of why people are concerned about a recession. She stated that one major indicator is that, currently, there is a negative yield curve. A negative yield curve means long-term interest rates are lower than short-term interest rates. Therefore, some conclude that there may be a recession by the end of 2023. Harrah added that there is the question of whether the Federal Reserve will continue to raise interest rates. She explained there have already been nine increases in a year, a pace that has not been seen in the past 40 years. Interest rates now stand at 4.75 to 5.0 percent, with additional rate increases expected by the end of 2023. Harrah stated that it appears the Federal Reserve is trying to raise rates but not enough to scare the banks.

Harrah shared that there are several factors that will keep inflation relatively high, including

• Higher defense spending,
• Infrastructure spending,
• Unspent COVID appropriations (must be spent by the end of FY 2024),
• Higher food prices, and
• Oil prices.

She stated that whether consumers will continue to spend remains unclear. She explained that retail sales had been growing significantly but were starting to come down. For awhile, home sales were high with low interest rates, but after the pandemic, as interest rates spiked, home sales declined 37 percent year over year. Car sales are up 8.3 percent, as supply chain concerns have eased a bit and pent-up demand appears to be driving sales.

Harrah continued that the summary of the economic forecast, therefore, has a lot of mixed signals, with several wild cards with possibilities that create a good deal of risk, such as the following:

• Government shutdown, which would cause a delay in federal discretionary spending and a small dip in GDP, followed by an economic bounce. Federal workers tend to be those most severely affected.
• Busting the U.S. debt ceiling, which would cause a plummeting of federal spending, an increase in taxes, and, if the U.S. government defaults on the nation’s obligations, the possible triggering of a worldwide recession.
• War spreading beyond Ukraine and Russia.

Harrah stated that changes in population growth would be significant for the economy and for the travel industry. Over the next 20 years, 50 percent of U.S. population growth is forecast for Texas, California, and Florida, and counter to national trends, the working age population in those states is increasing as well. The population of Illinois, in contrast, is forecast to decrease by 500,000 people. At the same time, the cohort of those age 65 and over will continue to increase, as will children. Together, these dependent populations will be a challenge.

An audience member asked whether immigration can play a role in increasing the working age population and helping to reduce the proportion of the dependent population to the working age population. Harrah responded that the political divisions in the nation and in Washington make it unlikely that politicians will enact substantive policy to help. Without change, the United States is likely to have some of the challenges faced by Japan and some European nations.