State and Local Finances Prop Up an Expanding U.S. Economy
Interview conducted by Rachel Duran
Editor’s Note: This interview was conducted October 17, 2014. For the latest information in regard to the U.S. economic forecast, visit www.conference-board.org.
The U.S. national economy is expanding, and is expected to continue to do so in 2015. One of the strengths has been an increase in local and state finances. Sales tax and income tax receipts have picked up across the country, and an increase in housing sales and the property taxes that accompany them, continue to strengthen the economic health of some areas.
While budget woes continue at the federal government level, state and local budgets are held at bay. In some cases there is money to set aside to improve infrastructure. It is important to note that state and local finances, which receive much less attention than federal finances, are almost twice as large.
The Conference Board’s Ken Goldstein points out that with the restoration of budgets, come hard questions: Where will we put the money? Back into education or into our crumbling infrastructure?
Heading into 2015, The Conference Board forecasts an improvement of above average growth for the country in the next few quarters, with the possibility of the Southwest outperforming the national economy, in terms of its labor and housing markets.
Rachel Duran: Ken, here we are in the fourth quarter of 2014. What is the national economic outlook, based on the latest findings of The Conference Board?
Ken Goldstein: The Conference Board runs two indicator series’, the Coincident Economic Index and the Leading Economic Index.
The Coincident Economic Index tells us where we are right now. The index has been moving along through the spring and summer, not setting any records but certainly not showing that the economy is or has been losing any steam.
The Leading Economic Index signals where the Coincident Economic Index may be headed and it is telling us we will have more of the same in the fall and winter, or even better growth, so we have an anomaly in the sense that if you look at U.S. economy it not doing great but it is OK. And if anything it may pick up steam.
And yet we see all this financial turmoil this week [October 13-17]. There is a real disconnect between what is going in the financial markets and what is happening in the overall economy.
What is driving that, and there are always different factors, one of which is here we are in October and this is the end of quantitative easing , the Federal Reserve’s bond buying program. Therefore we are “x” months away from when the Fed will start to raise interest rates.
And just as we saw in the spring of 2013, what is called the “taper tantrum” when it first became clear that quantitative easing was not going to go on forever. The Fed is not going to continue this program or start a new program, and we are back into tantrum mode, if you will.
It appears today [October 17] there is a bit of settling in the financial markets, the stock market, the bond market, the foreign exchange market and the commodities markets. We will see if this is a one day reprieve or something else.
In all likelihood it is more of a tantrum in the financial markets than a sign that we are facing a strong and long lasting deterioration of financial market conditions in part because the overall economy is doing OK, and will likely start to move up a bit.
There is no signal here from the overall economy and any of the individual segments of the economy and in any individual regionals of the economy that things are starting to fall apart.
Duran: The outlook is so much different compared to when we discussed the economy a year ago.
Goldstein: If you remember, a year ago is when the federal government shut down the economy. As we approach this mid-term election there is no sign that this is happening or that Congress will come back in the post-election lame duck session and shut down the government.
And one of the reasons for the improvement in the economy, certainly this year, is that state and local finances are in better shape than they have been since the beginning of the Great Recession.
One of the things going on is sales tax and income tax receipts have picked up a little bit. Even the housing markets of some of the states started to see improvement so there is a pickup in property taxes.
Many local finances, especially school finances, are tied to that property tax. We are not looking at major restorations in some of the budgets cut over the last few years. But it doesn’t look like for most places, even states like California, that more budget cuts are on the way.
Rather the discussion in terms of state and local finances is about how much to restore, and is there enough money to start to fix roads and bridges and tunnels and the crumbling infrastructure in many states across the country.
What is important is that while there remains a debate over the federal budget, state and local budgets are experiencing restoration to cuts, and even have some money to set aside to improve infrastructure.
If you look at the public sector, on one hand you have the federal government, which gets all the attention; and on the other hand you have and state and local finance, which gets much less attention and which is almost twice as large as federal finances.
In terms of the public sector there is some limited improvement. We are not back to where we were before, and we may not get back there.
In places like Texas, Pennsylvania, New Jersey and California, we are seeing a restoration of fiscal conditions in these states, based on what is going on in the overall economy.
Duran: What is behind this growth?
Goldstein: What is driving this expansion is that we are finally starting to see consistent gains in job growth, up in the 200,000 plus range each month. That range is likely to continue.
And because we are gaining jobs we also see some improvement in the housing market in many of these places. That combination of what is going on in the labor market and the housing market is in part what is also driving what is going on in finance at the state and local levels.
Duran: What are the challenges?
Goldstein: One of the big questions overall in the country is: at what point is this long enough and strong enough to start to drive up increases in wage growth? We are not there yet, but that is where we are going. The Leading Economic Index is giving us a true signal.
In 2015, we are likely to see a small increase in terms of wage growth, whether that is late winter or sometime in the spring. We will also see business investment begin to increase.
So right now, this remains a consumer driven growth spurt. It will continue through the holiday season, and into the winter. If by late winter we start to get wage growth that will sustain this consumer driven trend.
Duran: Ken, tie this economic outlook to what is happening in the U.S. Southwest’s economy.
Goldstein: In the Southwest you have an added factor. This is where a lot of nonenergy mining goes in, especially in terms of metals.
Texas is largely an energy story, despite the drop in the price of fossil fuels. Which comes back to the consumer story, which is not just about job growth. It is also about the fact that gasoline prices are a good 20 cents lower than a month or two ago. Even though wage gains are not picking up, you have a little extra money when you leave the pump. This is not necessarily true when you leave the grocery store.
So, west of Texas, in some parts of the Southwest there is a multiyear drought that has knocked down the agriculture sector. If that drought breaks, it will then add to what is going on in the consumer sector, in the energy sector and the non-energy commodities sector, and continue to give the Southwest overall improvement in the economy, the labor market and the housing market.
The continued improvement in the consumer sector in the Southwest is likely continue into the winter. And the continued gains in the energy sector, despite the drop in the price of crude oil, continues in part due to the exploitation of the new shale oil fields.
What is going on for the overall country will be an improvement in above average growth in the next few quarters. There is a chance the Southwest is likely to outperform the national economy, in terms of its labor and housing markets.
This is due to the different factors I have mentioned, including the improvement in the fiscal health of these states. It won’t be enough to restore all of the cuts that were put in place but certainly there will be efforts to restore some of it. We also need to work on the very important question of improving what has been a neglected infrastructure.
We are three weeks from the election and we are not hearing anything about tending to our physical infrastructure around the country. If there is restoration in funding cuts, where will we put the money? Back into education or into our crumbling infrastructure? These are hard questions.
We have a real test here about who can talk about this in an adult way and what type of resolution can we reach.
Ken Goldstein is an economist with The Conference Board, and can be reached by emailing email@example.com. The Conference Board is a global, independent business membership and research association working in the public interest. The board’s unique mission is to provide the world’s leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501(c)(3) tax-exempt status in the United States. Among its services, the organization publishes information and analysis, makes economics-based forecasts and assesses trends. To learn more, visit www.conference-board.org.
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