State of the Economy: “It Depends,” Of Course

Dan White of Moody’s Analytics briefed the Senate Budget and Taxation Committee on state of the economy on Tuesday afternoon.

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The bottom line: the economy is still good, and even has room to grow – but don’t expect that growth to last very long.

The next two years are going to be as good as they are going to get.

White said to expect 2.8 percent growth in 2018, and less growth in 2019 – though still above 2.5 percent. He advised the Committee to ensure that the State has a healthy Rainy Day fund balance to get through the decrease in economic activity anticipated for 2019-2020.

Economic growth is anticipated to result as early as this year in response to federal tax reform. However, many provisions of the tax reform bill expire after five years, after which point, further economic growth is uncertain. Ten years from now, economic growth is not anticipated to be significantly higher than it is today if tax reform provisions remain untouched. Higher inflation and interest rates could undo any growth experienced within the next few years.

The economy has room to grow. We can still increase employment, and today’s housing market is incredibly undersupplied. This in part results from the aftershocks of the housing bubble bursting, which has led to very cautious homebuilders. It can also result from the applicable labor supply diminishing.

Durable goods have been deflating for a few years in large part because of the decrease in costs for oil and gas. This not only affects transportation costs, but costs for plastics and other materials which include petroleum as an ingredient. This may be part of the reason that 31 states missed their sales tax projections by more than 1 percent last year.

The good news is that there is nothing to indicate that a bubble is forming today. The bad news is that bad things happen when there are no indications of bubbles. We have gone about a decade without anything bad happening yet, and that is a long time. Economists expect the economy to turn significantly around 2020.