Those who graciously obliged us with their time and insights include: Barry Flinchbaugh Professor of Agricultural Economics and Extension State Leader, Kansas State University Ernest Goss Professor of Economics, Creighton University, Omaha Kevin Kliesen Economist with the Federal Reserve Bank of St. Louis Charles Krider Professor, School of Business, Kansas University F. Charles Lamphear Director of The Bureau of Research and Chair in the Department of Economics, University of Nebraska, Lincoln Frank Lenk Director of Research Services for the Mid-America Regional Council Phil Miller Research Assistant Professor, Dept. of Economics and College of Business Research Center, University of Missouri, Columbia

Although we have invited all to assess the regional economy, each has a slightly different take on what that region entails. The Tenth Federal Reserve District, for instance, encompasses western Missouri, Kansas, Nebraska, Oklahoma, Colorado, Wyoming, and northern New Mexico. Professor Goss's forecasts are based on a monthly survey conducted at Creighton University of over 1,000 businesses from a nine-state area, the great majority of which reside in the 10th Federal Reserve District.

Frank Lenk draws his data from an annual economic forecast for the Kansas City area prepared under contract with the Kansas City Chamber of Commerce and is thus a little tighter in scope. Professor Lamphear's assessments for the region are likewise inferred from observations closer to home in Nebraska. Kevin Kliesen, whose views are solely his own and should not be attributed to the Federal Reserve Bank of St. Louis, its President, William Poole, or the Board of Governors, provides us with a St. Louis take on the region. It should be noted, too, that not all the economists chose to comment on each of the issues.

Yet for all the different perspectives, there seems to be a commonality of both interests and dynamics throughout Kansas and Missouri, Iowa and Nebraska, as well as the surrounding states of the central Midwest. Indeed, on many questions, there is a consensus or near consensus among our participants, even though they have come to these judgments independently, as does Tom Hoenig in his comments at the conclusion. On a few questions, however, there is no consensus at all. And this occasional wild card, this unpredictable element, is what makes economics so challenging and business so engaging.

Consensus: Consumer confidence remains high, but it may well have peaked.

Professor Phil Miller of MU affirms that "consumers still seem confident," but he, like the others, acknowledges that consumers are wearying of high gas prices. As Professor Ernest Goss of Creighton notes, higher energy prices may be having more impact on consumer confidence in "non-urban and rural areas." Closer to home, Frank Lenk of MARC observes that the CERI, which measures consumer confidence in Johnson County, shows its index of future expectations currently running 9 percent below last year. Johnson County would seem to be a good predictor for the region. Lenk attributes the predicted decline in confidence to uncertainty about the presidential election and recent stock market volatility.

Consensus: Retail sales will remain strong but not as strong.

Professor Charles Krider of KU speaks for just about all when he says that "retail sales will remain strong but the growth rate will moderate as the overall economy slows." Kevin Kliesen of the St. Louis Federal Reserve believes that higher energy prices act as a temporary tax on consumer incomes and thus have had some moderating influence on the pace of consumer expenditures during the second and third quarters of 2000 compared to the first quarter of the year. But, he adds, "barring something unusual - and hence unpredictable - I would expect that continued solid growth in real incomes, which is a by product of higher rates of trend labor productivity growth, should keep retail sales growing at a healthy pace both locally and nationally." From his perspective in Nebraska, Professor Lamphear sees retail sales "still running above projected growth" and not yet affected by a slightly diminished consumer confidence.

Consensus: Job growth will continue but at a slower rate.

There is an irony at work here. One of the primary reasons job growth will slow is, as Professor F. Charles Lamphear of the University of Nebraska notes, "the lack of qualified workers for all occupations." Goss makes the same point and adds, "Immigration is now an important factor in fueling job growth in the region." Kliesen sums the situation up thus, "The demand for labor continues to stay relatively strong, but the supply of employable labor has not kept pace." Lenk believes that the regional economy will create only half as many new jobs in 2001 as it did in 2000. Even though job growth may be slowing, Krider and others feel confident that "the full employment economy will continue."

Wild Card: Business services should prove the strongest growth sector but . . .

Miller of MU believes that business and professional services will prove their strength in the year to come. Lenk of MARC specifies medical services as an area of job growth as well as business services, these to be followed by other professional services and state and local government. Both Goss and Krider see business services as strong but Goss looks to food processing and Krider to technology as possible growth areas. In regard to continued strength, Kliesen sees business services only as a "probably" and retail trade as a "possibly." From his Nebraska perspective, Professor Lamphear feels that construction is "by far the strongest sector."

Near Consensus: High energy prices will sting selectively but not cripple.

Lenk makes the common-sense observation that as spending for energy increases, less income will be available for spending on other goods and services. As Kliesen notes, "Individuals and firms engaged in the transport of people and goods and services - for example, the airline and trucking industries and overnight parcel delivery services - have clearly taken a few body blows." Lamphear counts the trucking firms in his area as among those who have already felt the impact with the farm sector not far behind. As a trucking center, Kansas City has felt the impact as well. Worse, as Lenk adds, the Kansas City area is a non-producer of energy and thus gains nothing from high energy prices. Were the added expenditures to stay within the US, Lenk continues, it would not much affect overall US growth rates, but because the US imports over half of its oil, high energy prices function like a tax increase. More optimistic than most, Krider believes that the impact of high energy prices will be rather small and temporary. Says he, "I expect energy prices to be declining by the spring."

Near Consensus: High energy prices will have a modest, short-term impact on overall inflation.

Goss anticipates that overall inflation rate will rise somewhat over the next six months but decline thereafter. He believes that the rise in inflation will be driven more by higher energy prices than by higher labor costs. Not afraid to go out on a limb, he estimates the rate of inflation for the next six months to be 3.4%, annualized and seasonally adjusted. Krider largely concurs, "The main impact of higher oil prices will be slightly higher rates of inflation for a quarter or two but if the Fed does expand the money supply there will be no long term impact on inflation." A "potential fly in the ointment," according to Kliesen, concerns the wage-price nexus: this year's increase in CPI inflation could produce faster growth of nominal wages and salaries next year. COLAs and other contracts for labor, goods and services typically make adjustments based on the total CPI, including energy prices. "Any slip in productivity growth next year," Kliesen believes, "would be expected to ratchet up pressures on unit labor costs." Another potential fly, as Miller observes, is a "cold and snowy" winter.

Near Consensus: Scarce labor costs do drive up the costs of wages and benefits but less than one might expect.

Goss admits that wages have in general not been as responsive to labor shortages as most economists expected, "including me." One reason for the restraint, Lenk observes, "is that rising productivity is keeping labor cost per unit of production relatively moderate." "The key is productivity," says Professor Krider. As he sees it, firms will be able to pay higher wages without raising prices as long as productivity continues to rise at 3% plus per year. Lamphear adds that, from his perspective, "The only noticeable effect of the tight labor market is an increase in employee benefits." And benefit costs are aggravated, Kliesen notes, by the "rapidly escalating cost of health care benefits, which is largely unrelated to labor scarcity."

Consensus: The regional economy will continue to grow, if a little bit slower than recently, but more surely than the national economy.

"A remarkable performance by the economy" is how Krider summarizes the past few years. "Most credit to the Fed, he adds, "and, of course, the private sector." None of the economists surveyed, however, believes that the economy, regional or local, will continue at the current pace, but none predict a recession. Miller of MU thinks that the national economy will see growth taper off next year to the 2 to 3% range but expects the regional economy to remain strong. Lenk expects a 3.5 percent GDP increase in 2001 with a 4% growth in the region. Kliesen anticipates anywhere from a 3.5 to 4.5 percent growth next year in the GDP and in Missouri's domestic product as well. Krider anticipates that both nationally and regionally economic growth will continue strong in the 3 to 4% range. Goss anticipates the GDP and the region will see a healthy growth of 3% to 4% but cautions that a shift in the level of Federal crop support could slow growth particularly in Iowa, Kansas and Nebraska.

Near Consensus: Commercial construction will slow down, and so might residential construction.

All of the respondents who answered believe that commercial construction will definitely slow down, as Lenk notes, "in response to higher interest rates and a cooling economy." The outlook for residential construction is less certain. Miller of MU believes that the prospects are "weaker." Krider of KU believe that they are "quite good." These opinions are not necessarily antithetical. No one expects a surge like in 1998-1999, but no one expects the bottom to fall out of the market either. Lamphear expects that the demand will remain strong for homes above the median price level, but weaker for homes below that level. He notes, "Higher interest rates have impacted the lower end of the market." And Krider conditions his optimism on the hope that "interest rates do not rise further."

Wild Card: The agricultural outlook varies with region, weather, and crop.

"Mixed bag" is how Professor Barry Flinchbaugh of Kansas State University describes the ag outlook, and his sentiments mirror the others'. As he relates, production expenses will be up due to the cost of fuel and petroleum based inputs. On the positive side, he notes, 2000 will be a record year for government payments. In sum, net cash farm income, including government support, will improve in 2000 and again in 2001. If the Kansas farmer has been troubled by a drought, one that has led to low yields in soybeans and sorghum and slower planting of the winter wheat crop, farmers in the Eastern end of the region have experienced the opposite problem. Kliesen traces the problem in his area to "bin-busting crops" from "ideal weather." Krider explains, "Increased productivity in agriculture will mean continued high levels of output and downward pressure on prices." Goss adds that farm income, in the near future, "will not rebound to 1996 levels despite solid Federal crop." And Miller notes, "Low prices and high oil prices will make times trying for farmers."

Near consensus: International trade should continue to improve but not inevitably. Miller believes that "exports should be strong." Kliesen contends that the exports of manufactured goods are "on the upswing" and that this augurs well for the manufacturing-intensive Midwest. Lenk and others trace much of the growth to the recovery in the Asian markets. Lamphear, however, is less optimistic about agricultural exports which "have been, at best, weak." And he looks for that trend to continue. Kliesen and Goss both worry that the continued strength of the dollar will weaken the demand for American products abroad, especially in the non-agricultural markets.

Wild Card: No real fix on whether profit margins will expand.

Miller decidedly believes they will not. Goss explains that with higher energy prices, higher benefit costs, relatively high interest rates, and lower productivity growth (less than 2%), "Profit margins will decline over the next year." Kliesen is not optimistic that margins can continue to expand especially as "some surveys and anecdotal evidence continue to suggest that firms have limited ability to pass higher input costs onto customers." Lenk is more optimistic about those businesses that are "innovative" regardless of whether they are in a high-tech sector or not. And Lamphear remains bullish on those firms that "have adjusted their labor-capital mix to reflect the scarcity of labor."

Near Consensus: Businesses will continue to invest in plants and equipment but with less enthusiasm.

Lenk believes that "equipment is the primary way businesses embody innovative processes," so, of course, they must continue to invest. "With labor in relatively short supply," Kliesen sees capital investment as one way to moderate prices though he does expect to see a tempering of enthusiasm as the economy slows. Goss sees a relatively slow growth in "bricks and inventory" but continued high investment in new technology. "It is certain," affirms Krider, "that investment will be led by technology infrastructure as firms build their capacity to compete via the Internet." However, he too sees "a slightly slower" rate of growth. Miller is less optimistic about continued investment. But he and the others generally believe that interest rates will remain sufficiently stable to encourage investment.

Consensus: Credit will remain available for business expansion.

"Presently," says Lamphear, "credit is not a problem." Adds Kliesen, "No unusual difficulties have been detected in recent months." Goss contends that "banks will be much more vigilant in scrutinizing corporate loans than they have been in the past," but he too believes credit is available if at relatively high rates for non-blue chip firms. Lenk would like to see more venture capital in the area, and MARC is helping to do just that, but he too thinks that credit is "generally" available.

Wild Card: The biggest business story of 2001 (Headlines have been massaged).