February 2017 Commerce Club

Judith Schultz, GHPB

Workforce growth is the defining factor of the U.S. economy for Robert Kaplan, president of the Federal Reserve Bank of Dallas. “A sluggish workforce equals a sluggish GDP,” he told attendees at the Port Bureau’s February Commerce Club at Brady’s Landing. In a moderated conversation forum, with Vincent DiCosimo, senior vice president of petroleum logistics at Targa Resources, serving as the moderator, Kaplan responded to questions about the 2017 economic outlook in the U.S. and in Texas.
Kaplan said the U.S. economy grew at a rate of a little over 2% in 2016. He sees the same modest growth of just over 2% for 2017, pushed along by consumer spending. Integrally linked to consumer spending is the current unemployment rate of 4.8%. While acknowledging the participation rate is at about 63%, Kaplan believes this is closely tied to demographics. The combination of an ageing workforce, mismatch between educational programs and employable skills, and technological disruption have “People are aging out of the workforce,” stated Kaplan. “It’s going to get worse. If you project out another ten years, we believe the participation rate will be 61%.” Kaplan said demographic groups that reflect high school or less than high school education attainment are the hardest to employ. He cited vocational training and job retraining as essential to getting people back into the workforce.
In 2017 and beyond, a shrinking workforce poses the greatest threat to the economy. Kaplan told that for the last 20 years, immigrants and their children have comprised 50% of the U.S. workforce, and that in his view, the percentage should increase over the next 20 years. Again, Kaplan underscored vocational education as central to keeping the workforce growing.
Full employment and 2% inflation are economic targets named by Kaplan. “It’s called price stability,” he explained. “We’ve translated that into 2%.” Kaplan believes monetary policy acts with a lag. As such, accommodations, such a rise in interest rates, should be made slowly and sooner, rather than later. He compared it to slightly easing up on the accelerator without removing your foot. “We don’t want the Fed to expedite or play catch-up,” he said.
Kaplan described the U.S. as being at the “end of the debt super-cycle”, and that there was “no getting around the $46 trillion in underfunded entitlements”. Although he did not name specific policies or recommend particular reductions, Kaplan indicated there were measures under discussion that could be positive in reducing this debt issue.
Technology-enabled disruption to worker employment was another key area Kaplan tagged as needing analysis. “Young workers are more likely to be disrupted or replaced by technology,” he noted. “This is often confused with globalization. People attribute job reduction to trade, and recently, more often than not, it has to do with technology, not globalization.” This, he feels, has given trade something of a bad name.
Looking closer to home, Kaplan stated that Texas was bucking the aging worker trend. He attributed the influx of people to the state as a significant factor in “winning the people war” here. “I am very optimistic about the future of this state,” he declared. Kaplan specified that the energy sector represents about 7% of the Texas economy, an economy much more diversified than in the past and making for a stronger state. He sees the energy sector as being “neutral” in 2017, with oil prices more in line with a supply/demand balance, and that oil prices will continue to be firm. He gave a nod to the Permian Basin potential, indicating its “upside is enormous”. However, he cautioned for a wait and see attitude in order to evaluate OPEC response to the U.S. energy’s share gain.
Kaplan spoke positively about the commercial liberalization taking place in Mexico as the country continues to open opportunities up for foreign investment. In Texas, exports to Mexico are a critical part of the state’s economy. A strong supply chain industry has developed over the years for the $100 billion in exports, supporting about one million jobs in the state. “If undone,” he cautioned, “it could have unintended consequences.”
Discussing the possible Dodd-Frank rollback, Kaplan expressed support for less hoops for small and medium banks to jump through. “I think there needs to be more regulatory relief for small banks. They are critical to small business formation,” he explained. In the same vein, Kaplan sees the ExIm Bank as a help to small businesses. However, he did not favor regulatory reduction for large banks. “In terms of the big banks, I think we still need very tough regulation. That means sufficient capital, stress testing, good liquidity in a downsize scenario, and watching interconnectedness.”
Summing up, Kaplan emphasized he views potential policy through its likely effect on the growth of workforce and productivity. Thus, Kaplan advocates for regulatory review “in a sensible, balanced way”. He wants infrastructure spending to take advantage of public/private partnerships, with real oversight and permits/approvals expedited. “Beefing up infrastructure spending in a smart way will improve productivity,” he said. Corporate tax reform? Again, Kaplan stressed it’s subject to the details. “If it helps U.S. companies attract business; if it grows business and creates more jobs – that’s a healthy thing.”
What would best please Kaplan today? To hear a big push coming out of Washington for vocational training. “I think that would do both: grow the workforce and improve productivity,” concluding where he began, the value of a robust American workforce.

  • Date March 14, 2017
  • Tags March 2017