Mike Harvey from the Northwest Arkansas Council giving a wonderful talk about the Arkansas economy utilizing JobsEQ.

The housing market decline continues as housing starts and single-family home permits fell in May, though total permits increased due to a rise in apartment permits. Equities suffered their second week of decline in the last three weeks and are in danger of posting their first losing month since February. In contrast with the housing data and equities decline were an increase in leading indicators and a steeper Treasury curve. The steeper Treasury curve may indicate that investors are expecting increased economic growth is ahead. The Federal Open Market Committee (FOMC) meets later this week and while futures contracts are pricing a zero percent chance of a target rate decrease, the language of the release will be scrutinized for changes that may indicate what the next move will be. Futures indicate investors see an 86% chance the Federal Reserve will keep the funds rate target at 5.25% though the end of 2007.

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The possibility of recession strikes fear into the hearts of many Northeast Ohioans. As the region continues the painful transition from its manufacturing past, job prospects for many are bleak even when the national economy is strong. Is there reason to worry about an impending recession? It depends on who you ask.

Speaking in Hong Kong this past March, former Federal Reserve Chairman Alan Greenspan commented that, “When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that.” The stock market dropped sharply after those comments. Later in the week Greenspan clarified his remarks by stating, “By the end of the year there is the possibility, but not the probability, of the U.S. moving into a recession.”

While Greenspan’s clarification seemed to soothe investors and the market rebounded soon after, there are some who think the Federal Reserve is too worried about and acceleration in inflation and won’t decrease interest rates soon enough to avert a recession. The Federal Reserve’s monetary policy revolves around two goals: 1) encourage maximum sustainable output and employment growth in the nation, and 2) promote stable prices. At its May meeting the Federal Open Market Committee kept its focus on inflation while holding the federal funds rate at 5.25%. Consensus among economists is the rate will remain there until late this year.

The balancing act for the Federal Reserve is due to the impact which results from a change in the federal funds rate. A rate decrease lowers the cost of borrowing, increases investment spending, and reduces the foreign exchange value of the dollar. This will stimulate the economy and will also cause US consumers to purchase more US goods (due to more favorable prices when compared to imported goods). If monetary policy pushes labor and capital markets beyond capacity, however, wages and prices will rise at faster rates, leading to inflation. Since inflation is already hovering above the 1-2% annual rate the Fed prefers, there has been no action to lower interest rates despite a worse than expected advance GDP value of 1.3% for first quarter 2007 and a strong chance the figure will be revised downward.

So back to the question of whether Northeast Ohioans should be concerned about a recession. Despite the recent dip in GDP and the likelihood of a downward revision, economists expect growth to rebound in the second quarter and the remainder of 2007. For those of you who want to keep an eye on the situation, Chmura Economics & Analytics has created a recession probability index that can be viewed at www.chmuraecon.com. At this point, it’s showing a 23% probability of a recession starting by October 2007. While regional economic growth is likely to remain lower than the national rate, a national recession does not appear imminent.

Written May 15, 2007.

The first round court battle to uphold the Cleveland residency requirement for city employees ended in defeat for the city. A similar challenge by Akron met the same fate. While a residency requirement may provide a barrier to leaving, it does little to address the underlying problems that cause population decline.

After reaching a peak of nearly 950,000 residents in 1950, the population of Cleveland declined to 452,208 in the 2005 Census estimate as residents sought more desirable places to live. Relative to most other areas in the county and Northeast Ohio, Cleveland suffers from struggling schools, limited services, higher crime rates, higher poverty rates, and a higher unemployment rate. Unfortunately, the city has received national attention for several of these challenges in recent years, despite many recent successes of the county and greater metropolitan area. Cleveland is a victim of political boundaries that include many of the region’s most depressed areas while excluding those that are more prosperous.

Economics assumes that individuals will make rational decisions about where to live. They will weigh the costs and benefits and do their best to choose a location which will maximize happiness based on their individual preferences. People will stay if Cleveland can offer some of the amenities present in surrounding communities such as effective schools and a low crime rate.

One of the real culprits in the population flight might be our regional infrastructure. As highways are expanded and traffic pinch points are upgraded, it is easier than ever to commute from the edges of the county and beyond. Sprawl is a problem common to older cities as individuals and families with means relocate further and further from the urban center to enjoy larger yards, less expensive real estate, better schools, and safer neighborhoods. Businesses follow the talent pool from which they draw, and as new offices are built in the suburbs it becomes easier for employees to move even further from the urban center. The migration robs urban centers of its residents and its tax base.

Despite a highway system that allows individuals who work in Cleveland to live far beyond city limits, commuting still has its costs. Commuting time, the frustration of sitting in traffic, transportation costs, and in some cases additional local income tax, all make living closer to your employer more desirable.

It may be some time yet before areas in Cleveland appeal to young couples looking to raise a family. Nevertheless, ongoing revitalization efforts hold promise and some neighborhoods, including downtown, are experiencing population growth. As convenient shopping areas and upscale living options become available, Cleveland may be able to attract more of the highly educated residents it seeks, and the businesses that want to hire them.

If Cleveland leaders want to convince employees to live in the city, they should save the money that would be spent on lawyers fighting to keep the residency requirement. An effective public school system would be a far better investment.

Written April 16, 2007.