Four Questions with Toby Madden
Regional economist Toby Madden has worked at the Federal Reserve Bank of Minneapolis since 1995, when he was hired as a management analyst. He has also worked for TCF Financial Corp. and Ernst and Young. A Minnesota native, Madden earned both his bachelor’s degree in accounting and his master’s degree in finance from the University of Minnesota. He is currently working on his Ph.D. in Applied Economics. Madden frequently writes and speaks about business and the economy. He is a certified public accountant and a certified management accountant, and he sits on the board for the Institute of Financial Economics.
What is the economic outlook for Minnesota and the United States?
The Minnesota economy loosely follows the national trends. Both are currently battered by three negative shocks: higher energy prices, an overbuilding of homes and a tightening of credit. These shocks have a negative impact on both aggregate supply and aggregate demand. Economic output should expand at a very sluggish pace, and employment may fall in 2008 and 2009.
How will manufacturers fare in this economy?
Generally, manufacturing should fare better than the rest of the economy. This is due to a couple of factors related to supply and demand. On the demand side, higher transportation costs and the change in the value of the dollar increase demand for products produced in the United States. On the supply side, the story is somewhat mixed. Higher costs for materials are reducing supply, but more available labor is increasing supply. What’s really driving the positive outlook for manufacturing is the expected continued increase in productivity. The longterm trend in manufacturing is solid productivity growth. Increasing productivity allows more output at less cost. So, even though manufacturers are somewhat mixed on the increasing costs of materials, companies are figuring out how to use those materials more effectively, reducing waste, using their space more efficiently and using their people more efficiently.
Besides productivity gains, what strategies should manufacturers follow to grow their
businesses?
Certain sub-sectors of manufacturing will grow faster than average partly due to changes in demand. Manufacturers trying to expand their production, or trying to get into new markets, should look at changes in demand for the various sub-sectors. A company that is in an industry where the outlook for future demand is flat or decreasing might want to broaden its product base to other sectors or niches that might be growing. For example, as the population ages, people are demanding more medical services, including more medical products. Companies would expect the medical device industry to grow. So companies not only rely on efficient investments of their capital equipment dollars and human resources, but may try to direct those resources to growing segments. On the flip side, companies may see a reduction in demand for energy-intensive machines and therefore may invest in research on energy efficiency.
What are the risks to the manufacturing sector?
There can always be unexpected shocks to the economy. Manufacturers should adjust to changes in the factors of supply and demand. In addition, flexibility allows businesses to move into new markets if old markets begin to wane in demand.