What's ahead for the economy? State lawmakers face huge fiscal challenges as they convene their 2003 legislative sessions. What might they expect from the economy as they craft next year's budgets?The 2003 legislative sessions are shaping up to be among the most challenging in more than a decade. To help state legislators get a better sense of the economic picture and what they might encounter in coming months, NCSL NCSL National Conference of State Legislatures NCSL National College for School Leadership NCSL National Conference of Standards Laboratories NCSL National Council of State Legislators NCSL National Computer Systems Laboratory (NIST) interviewed David Wyss, chief economist The Chief Economist is a single position job class having primary responsibility for the development, coordination, and production of economic and financial analysis. It is distinguished from the other economist positions by the broader scope of responsibility encompassing the at Standard & Poor's. THE BIG PICTURE Q. Although the National Bureau of Economic Research The National Bureau of Economic Research (NBER) is a "private, nonprofit, nonpartisan research organization" dedicated to studying the science and empirics of economics, especially the American economy. (NBER NBER National Bureau of Economic Research (Cambridge, MA) NBER Nittany and Bald Eagle Railroad Company )--the official arbiter of a recession's starting and ending points--has yet to report, there have been numerous media stories saying that the recession is over. What are the chief indicators that an economic recovery is under way? A. Real gross domestic product has now risen for four consecutive quarters, historically enough to allow the NBER to declare a recovery. However, employment has risen much less consistently, with two consecutive declines in September and October after five increases. The manufacturing sector continues to lag. The recovery seems in place, but is still spotty spot·ty adj. spot·ti·er, spot·ti·est 1. Lacking consistency; uneven. 2. Having or marked with spots; spotted. spot across sectors. Q. What is the prospect for a strong economic recovery? What are the biggest threats to the recovery? A. I do not expect a strong economic recovery. I think the upturn will be even more anemic anemic pertaining to anemia. than the "jobless recovery A jobless recovery or jobless growth is a phrase used by economists to describe the recovery from a recession which does not produce strong growth in employment. The phrase originated in the early 1990s in the United States, to describe the economic recovery at the end of " of 1991-92. Consumers seem spent out, and business is not yet ready to pick up the lead. Moreover, weak foreign economies are dragging back the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. . Q. Which states will rebound most quickly and why? Which states are likely to lag behind the national recovery? A. The pattern of the recession was first, dot.com and high-tech states; second, heavy manufacturing; and third, tourism. The recovery is likely to be in the opposite order, with tourist states such as Florida and Arizona coming out first and the high-tech states like California and southern New England New England, name applied to the region comprising six states of the NE United States—Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, and Connecticut. The region is thought to have been so named by Capt. last. Note that some of the Great Plains states have not really had a recession because their unemployment rates are below pre-recession levels. The Great Lakes Great Lakes, group of five freshwater lakes, central North America, creating a natural border between the United States and Canada and forming the largest body of freshwater in the world, with a combined surface area of c.95,000 sq mi (246,050 sq km). and West Coast were hit hardest. Q. Is the U.S. economy still being affected by the Sept. 11 terrorist attacks? A. Although the consumer rebounded quickly after the terror attacks terror attack n → atentado (terrorista) terror attack n → attentato terroristico , businesses have not. The uncertain prospect of further terror attacks still weighs on business confidence and is slowing capital spending capital spending Spending for long-term assets such as factories, equipment, machinery, and buildings that permits the production of more goods and services in future years. . It is also a factor cutting investor confidence and keeping the stock market weak. Q. Because of balanced budget Balanced budget A budget in which the income equals expenditure. See: budget. balanced budget A budget in which the expenditures incurred during a given period are matched by revenues. requirements, states don't have the ability to deficit spend. But the federal government does. Is federal deficit spending Deficit spending When government spending overwhelms government revenue resulting in government borrowing. deficit spending Expenditures that are in excess of revenues during a given period of time. helping to accelerate economic recovery? A. The federal budget has gone from a $255 billion surplus in FY 2000 to a $175 billion deficit in FY 2002. That is $430 billion of stimulus for the economy, or 4 percent of the GDP GDP (guanosine diphosphate): see guanine. . Government spending Government spending or government expenditure consists of government purchases, which can be financed by seigniorage, taxes, or government borrowing. It is considered to be one of the major components of gross domestic product. and tax cuts have kept the economy growing despite weak corporate spending. Q. What are the longer term implications of federal deficit spending? A. Federal deficits push interest rates--and especially long-term interest rates--up. Money borrowed by the federal government is money not available for private capital spending. In the short run, that is of little importance because no one wants to invest anyway. As the economy comes back, deficits will restrict the economy's potential growth. Q. Is there anything that states can do, within their existing constitutional constraints, to help stimulate recovery? A. The important thing is to do the important things. States have to balance their budgets, but they should be careful to protect those expenditures that promote long-term growth, especially education. Most importantly Adv. 1. most importantly - above and beyond all other consideration; "above all, you must be independent" above all, most especially , the next time this happens it would be nice to have some rainy rain·y adj. rain·i·er, rain·i·est Characterized by, full of, or bringing rain. rain  i·ness n.Adj. day funds built up so that there will be less dislocation dislocation, displacement of a body part, usually a bone. When a bone is dislocated, the ends of opposing bones are usually forced out of connection with one another. In the process, bruising of tissues and tearing of ligaments may occur. . Q. Would the economy benefit if the states initiated a major capital construction boom? A. Sure. Although residential construction is strong, the weakness of nonresidential building means heavy construction capacity is available. Q. How did this economic downturn compare with the one in the early 1980s and how about the one in the early 1990s? A. This downturn is the mildest in postwar history--about the same as the 1970 recession. The peak-to-trough decline in real GDP Real GDP This inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices. Often referred to as "constant-price", "inflation-corrected" GDP or "constant dollar GDP". was only 0.6 percent, compared with 1.5 percent in 1990-91 and 2.8 percent in 198 1-82. The unemployment rate is 5.7 percent; only one other recession (1970) has had peak unemployment below 7 percent and none under 6.5 percent. ECONOMIC IMPACTS ON THE STATES Q. Why does recovery in state tax collections lag behind a national economic recovery? A. Taxes lag income. In general, the lag is not too great. Sales taxes sales tax, levy on the sale of goods or services, generally calculated as a percentage of the selling price, and sometimes called a purchase tax. It is usually collected in the form of an extra charge by the retailer, who remits the tax to the government. move with the economy and income taxes lag only slightly. Property taxes, of course, tend to drop late in the recession and rise only with a lag because housing prices tend to bottom out about a year after the economy. In addition, of course, there is a lag in the assessment process. Q. Forty-one states and the District of Columbia District of Columbia, federal district (2000 pop. 572,059, a 5.7% decrease in population since the 1990 census), 69 sq mi (179 sq km), on the east bank of the Potomac River, coextensive with the city of Washington, D.C. (the capital of the United States). levy a broad-based personal income tax. Taxes on capital gains and other unearned income Unearned Income Any income that comes from investments and other sources unrelated to employment services. Notes: Examples of unearned income include interest from a savings account, bond interest, tips, alimony, and dividends from stock. helped fuel the incredible revenue boom of the late 1990s. What's the prospect for the stock market to return to pre-March 2000 levels? A. Even more than the straight capital gains taxes, the stock market caused employees to exercise their stock options and 401(k) withdrawals. The stock market is going to become even more important as the baby boomers See generation X. approach retirement with bigger 401(k) and IRA Ira, in the Bible Ira (ī`rə), in the Bible. 1 Chief officer of David. 2, 3 Two of David's guard. IRA, abbreviation IRA. funds. The stock market will regain its March 2000 peak of 1,528 (S&P 500), but don't hold your breath. We think it will take five to eight years to get back, and longer for the NASDAQ NASDAQ in full National Association of Securities Dealers Automated Quotations U.S. market for over-the-counter securities. Established in 1971 by the National Association of Securities Dealers (NASD), NASDAQ is an automated quotation system that reports on . After the 1966 market correction Market correction A relatively short-term drop in stock market prices, generally viewed as bringing overpriced stocks back to a level closer to companies' actual values. , the Dow didn't regain its peak for six years. After the 1973-74 downturn, it took nine years. Q. Because personal income tax collections are such an important piece of the revenue pie, many states also are concerned about unemployment levels. What is the outlook for employment gains in the first half of 2003, and how will various states be affected? A. This is another jobless recovery, like 1991-92. Economic growth has returned, but at a sluggish pace. Strong productivity gains, while helping incomes, are slowing job growth, especially in manufacturing. We expect the unemployment rate to peak in early 2003, but to come down only slowly. The heavy manufacturing states will probably have the most difficulty coming back from the recession. Q. Forty-five states levy a state sales tax. What is the outlook for consumer confidence? A. Consumer confidence hit a nine-year low in October. We expect the consumer to come back, but December is expected to be among the weakest Christmas sales seasons since 1991. Q. Some states rely on severance taxes--especially on oil, natural gas and coal--for substantial portions of their revenues. What is the outlook for energy prices? A. The outlook for energy prices depends heavily on the Middle East. A war with Iraq could send energy prices up sharply; during the 1980 Iranian hostage crisis When a surrounded terrorist or criminal tries to hold off the authorities by force, it is considered a "barricaded suspect" situation. When a person/s holds others against their will, but keeps them hidden, it is simple kidnapping. , oil hit $40 a barrel ($75 in today's dollars). Barring that, oil prices are likely to settle into the mid-$20s, not much different from the current level. We do not think there is much "war premium" in the current price. STATE ACTIONS IN THE CURRENT ECONOMIC CLIMATE Q. The cumulative state budget gap exceeded $86 billion in FY 2002 and FY 2003. Are state actions to close their gaps adversely affecting the economic recovery? A. Yes. Cutbacks by states are partially offsetting the stimulus from the federal government. Q. What are the least disruptive actions to the economy that states can take to resolve large budget gaps? A. In general, states should cut back the least stimulative programs and focus on those that create jobs and long-term growth. This is a difficult choice, however, since matching federal funds Federal Funds Funds deposited to regional Federal Reserve Banks by commercial banks, including funds in excess of reserve requirements. Notes: These non-interest bearing deposits are lent out at the Fed funds rate to other banks unable to meet overnight reserve have to be taken into account. In addition, some of the long-term capital projects that should rationally be postponed don't count against the operating deficit. Postponing tax cuts and new programs usually makes more sense than cutting existing programs or raising taxes. Eliminating waste and corruption also sounds like a great idea, but can be hard to identify. Q. There was a dramatic drop-off in state tax collections in FY 2002, especially in personal income tax receipts. Because many states have cut spending for two consecutive years, there is some speculation that they may increase taxes or other revenues in their 2003 legislative sessions. How would state tax increases affect the economic recovery? A. Tax increases, like spending cuts Noun 1. spending cut - the act of reducing spending cut - the act of reducing the amount or number; "the mayor proposed extensive cuts in the city budget" , are a drag on Verb 1. drag on - last unnecessarily long drag out last, endure - persist for a specified period of time; "The bad weather lasted for three days" 2. the economy. By reducing what people have to spend, they slow demand growth. Q. If states opt to raise taxes, are some taxes preferable to others from an economic standpoint? A. Yes, but that may vary from state to state. Generally, states need to be careful not to create incentives to move activities out of state. Individual income and sales taxes are usually the least disruptive of the major tax categories. At least in the short run, real estate taxes have a modest impact on the economy. There is often, however, a trade-off between efficiency and equity. The tax with the least impact on real GDP is a head tax (the same for everyone), but that is unfair and unpayable for many households, especially for those who have lost jobs. Q. Several states have had their bond ratings lowered in recent months. Should states be accelerating bond issues because interest rates are at historic lows or should they wait until their bond ratings are upgraded? A. That depends on what their prospects are. In general, states should probably take the opportunity to lock in low rates. Unless you expect your bond rating to change more than one or two notches, you shouldn't wait to refinance Refinance 1. When a business or person revises their payment schedule for repaying debt. 2. Replacing an older loan with a new loan offering better terms. Notes: When a business refinances they typically extend the maturity date. . Q. How do you think the Federal Reserve Board will act regarding interest rates? A. The Fed will keep cutting until either the unemployment rate drops or the interest rate hits zero. The recent Fed rate cut shows they aren't afraid of cutting rates. TYING IT ALL TOGETHER Q. What's the bottom line on the outlook for the U.S. economy? A. We believe the economy is recovering, but at a snail's pace snail's pace Noun a very slow speed , similar to the 1991-92 recovery. Moreover, the risk of a double-dip recession double-dip recession An extended decline in economic activity following an aborted recovery from a previous recession. A relatively weak economic recovery sometimes causes investors to worry about the economy entering another recession. , caused by developments in the Middle East or by another stock market crash, is significant. Q. What advice would you offer policymakers as they craft their FY 2004 budgets? A. Be cautious. There is still risk on the downside On the Downside is an EP by the San Diego, California band Counterfit, released by Alphabet Records in 2000. It was the band's first EP, recorded shortly after the members had relocated to San Diego from Fairfield County, Connecticut. , and you shouldn't plan for a "stretch" budget--that is planning for more revenues than you are likely to get. Make sure you protect what really needs protection, and cut everything else. [GRAPH OMITTED]
CURRENT UNEMPLOYMENT RATES AND HISTORICAL HIGHS AND LOWS
Sept. 2002 Historical High
(preliminary)
State Rate Date Rate
Alabama 5.7 Dec. 1982 15.6
Alaska 7.5 Aug. 1986 11.6
Arizona 5.7 Feb. 1983 11.7
Arkansas 5.0 Feb. 1983 10.5
California 6.3 Feb. 1983 11.0
Colorado 5.2 Oct. 1982 8.8
Connecticut 4.1 Feb. 1992 8.2
Delaware 4.1 Jan. 1982 9.1
Dist. of Columbia 6.0 July 1983 11.9
Florida 5.1 Mar. 1983 9.7
Georgia 4.7 Dec. 1982 8.5
Hawaii 4.2 Sept. 1978 7.8
Idaho 5.5 Jan. 1983 11.4
Illinois 6.3 Dec. 1982 12.9
Indiana 5.0 Nov. 1982 12.7
Iowa 3.9 Jan. 1983 8.9
Kansas 4.6 Aug. 1982 7.5
Kentucky 5.2 Dec. 1982 12.6
Louisiana 5.9 Sept. 1986 13.6
Maine 4.1 Feb. 1983 9.9
Maryland 4.0 Jan. 1982 8.7
Massachusetts 5.2 July 1991 9.6
Michigan 5.8 Nov. 1982 16.3
Minnesota 4.0 Feb. 1983 9.2
Mississippi 5.9 Feb. 1983 13.8
Missouri 4.8 Apr. 1983 10.6
Montana 3.9 Mar. 1983 9.2
Nebraska 3.4 Jan. 1983 7.1
Nevada 4.9 Feb. 1983 11.6
New Hampshire 4.5 July 1982 7.9
New Jersey 5.3 May 1992 9.4
New Mexico 6.1 Feb. 1983 11.7
New York 5.6 Apr. 1983 9.2
North Carolina 6.1 Feb. 1983 10.0
North Dakota 3.5 May 1986 6.7
Ohio 5.5 Jan. 1983 13.8
Oklahoma 4.2 May 1983 9.7
Oregon 6.8 Jan. 1983 12.4
Pennsylvania 5.2 Feb. 1983 13.1
Rhode Island 5.0 Oct. 1982 10.9
South Carolina 5.3 Feb. 1983 11.7
South Dakota 2.6 Feb. 1983 6.3
Tennessee 4.8 Dec. 1982 12.8
Texas 6.1 Oct. 1986 9.4
Utah 5.3 Apr. 1983 10.5
Vermont 4.0 May 1983 7.5
Virginia 3.9 Mar. 1982 8.0
Washington 7.4 Nov. 1982 12.5
West Virginia 6.1 Feb. 1983 19.5
Wisconsin 5.1 Jan. 1983 12.7
Wyoming 3.9 Feb. 1987 10.7
Historical Low
State Date Rate
Alabama Aug. 1998 4.1
Alaska Nov. 1998 5.5
Arizona Jan. 2001 3.8
Arkansas Nov. 1999 4.2
California Feb. 2001 4.7
Colorado Jan. 2001 2.7
Connecticut Aug. 2000 2.1
Delaware May 1988 2.9
Dist. of Columbia Nov. 1988 4.4
Florida July 2000 3.5
Georgia Dec. 2000 3.6
Hawaii July 1989 2.3
Idaho Jan. 2001 4.5
Illinois Apr. 1999 4.1
Indiana July 1999 2.7
Iowa Mar. 2000 2.4
Kansas June 1978 2.7
Kentucky May 2000 3.9
Louisiana Dec. 1999 4.7
Maine Jan. 2001 3.3
Maryland Sept. 1999 3.4
Massachusetts Oct. 2000 2.5
Michigan Mar. 2000 3.2
Minnesota Aug. 1998 2.4
Mississippi Feb. 1999 4.6
Missouri Jan. 2000 2.9
Montana Sept. 2002 3.9
Nebraska June 1990 2.1
Nevada June 1978 3.7
New Hampshire Mar. 1988 2.2
New Jersey Feb. 2001 3.5
New Mexico Jan. 2001 4.5
New York Apr. 1988 3.9
North Carolina June 1999 3.0
North Dakota Oct. 1997 2.3
Ohio Mar. 2001 3.9
Oklahoma Jan. 2001 2.9
Oregon Mar. 1995 4.4
Pennsylvania Mar. 2000 4.0
Rhode Island May 1988 2.7
South Carolina Mar. 1998 3.3
South Dakota Mar. 2000 2.0
Tennessee July 2000 3.8
Texas Dec. 2000 3.9
Utah Mar. 1997 2.9
Vermont July 1988 2.4
Virginia Apr. 2000 2.1
Washington Nov. 1997 4.4
West Virginia Dec. 2001 4.6
Wisconsin June 1999 2.8
Wyoming Apr. 1979 2.2
Note: Data begin in 1978, except for California, where they start in
1980.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics.
RELATED ARTICLE: DAVID WYSS: ECONOMICS EXPERT David Wyss, chief economist at Standard & Poor's, has an extensive and impressive background in public finance and economics, with stints at such distinguished institutions as the President's Council of Economic Advisers, the Federal Reserve Board and the Bank of England Bank of England, central bank and note-issuing institution of Great Britain. Popularly known as the Old Lady of Threadneedle Street, its main office stands on the street of that name in London. . In his current position, Wyss is responsible for S&P's economic forecasts and publications, and co-author co·au·thor or co-au·thor n. A collaborating or joint author. tr.v. co·au·thored, co·au·thor·ing, co·au·thors To be a collaborating or joint author of: "He and a colleague . . . of the monthly Forecast Summary and the weekly Financial Notes. He also manages research projects, especially on financial risk and tax policy. Wyss holds a B.S. from the Massachusetts Institute of Technology Massachusetts Institute of Technology, at Cambridge; coeducational; chartered 1861, opened 1865 in Boston, moved 1916. It has long been recognized as an outstanding technological institute and its Sloan School of Management has notable programs in business, and a Ph.D. in economics from Harvard University Harvard University, mainly at Cambridge, Mass., including Harvard College, the oldest American college. Harvard College Harvard College, originally for men, was founded in 1636 with a grant from the General Court of the Massachusetts Bay Colony. . He testifies regularly before Congress, is quoted often in the press and has appeared on many major television programs. Corina Eckl heads NCSL's Fiscal Affairs program. She interviewed David Wyss in mid-November for this piece. |
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