Goolsbee cautions Iowa ag, manufacturing industries: Economic changes ahead

With its reliance on agriculture and manufacturing, the Midwest economy is especially sensitive to global economic challenges such as tariffs, Chicago Fed President and CEO Austan Goolsbee told leaders at the Corridor Media Group's Mid-Year Economic Review events.

The Q&A-style fireside chat was first hosted by Corridor Media Group President & CEO John Lohman at the Rhythm City Casino Resort in Davenport. The same program was presented Tuesday, June 3 at the Corridor Business Journal’s Mid-Year Economic Review at the Doubletree by Hilton in Cedar Rapids.

Mr. Goolsbee’s responses were laced with the kind of quips that led the then President Obama White House economic advisor to take home the top prize in the 16th Annual “D.C.’s Funniest Celebrity” contest in 2009. Indeed, when Mr. Lohman asked him about a long list of accolades that included the ‘funniest’ honor, Mr. Goolsbee reminded the crowd that second place that year went to the American Taxpayer Federation’s Grover Norquist. “So the contest was exactly what you would expect,” he laughed.

Mr. Goolsbee brought with him to the Chicago Fed an impressive resume that includes serving as the Robert P. Gwinn Professor of Economics at the University of Chicago’s Booth School of Business. He also was a member of the Council of Economic Advisers before becoming chair, and was a chief economist and chief-of-staff to Paul Volcker on President Obama’s Economic Recovery Advisory Board, which was created to attack the 2008 Global Financial Crisis.

The Fed’s mission

Mr. Goolsbee was named to lead the Chicago Fed in 2023. It is part of the Federal Reserve, which was established in 1913 to promote and protect financial stability that came out of the panic of 1907.

Its mission today is to set monetary policy, not fiscal policy which is the purview of Congress and the president and designed to be as “independent of political interference as it’s possible to be in a democracy,” Mr. Goolsbee told the crowd at the QCBJ’s third annual MidYear Review.

The Fed includes a dozen reserve banks sprinkled around the country. The Quad Cities and the Corridor are in the Federal Reserve’s Seventh District, which is known as the Federal Reserve Bank of Chicago. That name is misleading since the Chicago Fed serves Iowa and most of Illinois, Indiana, Michigan, and Wisconsin.

The Midwestern district also includes a large chunk of the nation’s cycle agricultural and manufacturing sectors. Both of those sectors, Mr. Goolsbee said, are especially sensitive to global economic changes such as tariffs that are impacted by policy decisions.

In fact, he said “in an analysis of the most tariff-exposed states, four of the top seven are in this district, and Iowa was very high on that list.” That makes the Seventh District “kind of tip of the spear and the canary in the coal mine” for the impact of tariffs and potential supply chain disruption. So, he added, “if you start to see manufacturing really encountering a difficult period, that might be a sign that recession is coming, because it’s more cyclical.”

The U.S. Federal Reserve, or the Fed’s dual mandates are the job market rate in any given month and various measures of inflation.

Beyond the headlines

“That said, a lot of weird things have happened in the job market in the last five years, as you know, so it behooves us to look beyond just the headline big numbers like the unemployment rate and the number of jobs nationwide,” Mr. Goolsbee said.

He emphasized the importance of gathering real-time data and regional perspectives to supplement the “official” data on which the Fed has long relied. Because that data is quickly outdated, especially in a changing market, the Chicago Fed goes visits some three dozen companies throughout the district. He said those visits are critical in understanding supply chain disruptions and inflationary pressures in the Seventh District.

The Fed’s mission is to stabilize prices and maximize employment, “and that’s not always easy to do,” Mr. Goolsbee said. In setting interest rates, he said, the Fed considers data that also includes commodity prices, productivity and “zillions of other things that change over time.”

In fact, Mr. Goolsbee called himself a member of the “datadog caucus” and said “one of the key rules of the datadogs is to sniff out all data sources, and when you have uncertainty, go find more and more information.”

When asked to speculate on future Fed actions, Mr. Goolsbee reminded the crowd that by law he cannot speak for the Fed, and can only speak for himself before saying, “so far we’ve had, in the past two months, excellent inflation reports.”

Before April, he said, the Fed’s dual mandate also was “looking pretty good.” The unemployment rate was around 4% or close to stable full employment, and the inflation rate, which he said had gotten “way, way too high,” had been coming down steadily. As a result of that and other data, he was saying then, “Hey, we’re coming in with a nice landing.”

Future hard to predict

Looking forward, however, he said that if rates are below where they are today and the economy encounters turbulence over the next 12-18 months, “I think it’s just a little harder to see exactly, are we still on that path?”

Ag and manufacturing sectors aren’t the only ones keeping an eye on tariffs and any resulting supply chain interruptions like the ones that heavily impacted builders, retailers and others during the COVID 19 pandemic.

During a listening event in Chicago attended by business leaders from around the district, Mr. Goolsbee said he heard from an Iowa construction company who said, “Hey, we’re basically in a pencil-down mode” while tariffs remain in play.

He added, however, “there was optimism, too, that people thought we’re on the backend of this thing, if we could open up some new markets, if it didn’t turn into as big of a cost-driver as the kind of the first round announcements.”

In fact, Mr. Goolsbee said by the time the harvest comes in this fall, it might be fine.

When asked by Mr. Lohman to forecast the challenges facing regional mid-market companies Mr. Goolsbee said for those who are tied to agriculture and manufacturing potential tariffs and other fiscal policy choices “(they) are going to be more impactful, and whether there is retaliation for other countries, going to be more impactful to the short to medium operation. So unfortunately, we’ve all got to buckle our seat belts.”