Ohio economic forecast: in like a lion, but then what?

• Author: Mayland, Ken
• Position: Cover story

What does Ohio's economic future hold and what does it mean for business? While the long-term prospects are good, episodes of rising interest rates could cause an economic hiccup towards the end of 2006. At the same time, the national numbers are showing growth--so why does Ohio continue to lag?

Tone of the economy

Is business in Ohio expanding by leaps and bounds? Is business on the ropes? If you simply looked at the economy's growth, as measured by the quarterly, annualized changes of inflation-adjusted gross domestic product (GDP), you could come to any of these conclusions.

Here are the numbers:

2005:

Third quarter growth, 4.1% (great!)

Fourth quarter growth, 1.7% (disappointing)

2006:

First quarter growth, 4.8% (terrific!)

Second quarter growth, perhaps around 3% (so-so)

This yo-yoing of growth rates has come as a result of three main factors:

1. The stop-go pattern of auto sales incentives

2. The timing of government defense purchases

3. The timing of surges of imports and exports

   In the first quarter of this year, light vehicle sales saw significant, but temporary, improvement; government defense buys made up for lost time; and the foreign trade picture showed better balance (i.e. better export growth). Hence, if the economy grew at a snail's pace in the fourth quarter, it galloped like a Kentucky Derby winner in the first quarter. Because of this volatility I chart the momentum--the year-over-year percent changes--of economic and industrial growth, to look past the "noise." (See chart: Growth trends: Real GDP and industrial production.)

   But all this begs the question: what is really going on? 2006 kicked off on strong footing. Consumers are confident; that's the true message of the "negative" personal savings rate. Job creation appears on the verge of stepping up a notch. With wage growth picking up too, there is adequate fuel to propel consumer spending moderately higher. Solid demands, lean inventories relative to sales (see chart: Leading sectors: Housing starts and light vehicles), and a few "hot" industries have factory output advancing briskly as well.

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   Policy impetuses

   New federal government tax and spending initiatives have been taken virtually out of play, hobbled by large and persistent budget deficits. With the Iraq War and hurricane reconstruction spending gobbling up resources, the best hope is that previous tax cuts with sunsets will be extended further into the future. President Bush recently signed just such a bill, extending the 15...