The State of the SD Economy · Overview of US economy US economy forecast SD economy Summary & Conclusions. US Forecast IHS MARKIT Forecast – May 8, 2018 Real GDP Consumption, ...
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The State of the SD Economy
Presentation to the Governor’s
Council of Economic Advisors
May 17, 2018
Ralph J. Brown, Professor Emeritus of Economics
University of South Dakota
Outline of Presentation
Overview of US economy
US economy forecast
SD economy
Summary & Conclusions
US Forecast
IHS MARKIT Forecast – May 8, 2018
Real GDP
Consumption,
Housing Starts
Federal Budget
Interest Rates and Inflation
GDPGood growth in 2018 and 2019 at 2.8%. In 2020 growth slows to 1.9%.Consumer spending will continue to contribute to growth supported by improving HH finances, lower taxes, strong labor market, real income increases, and rising home prices.Diluted tariffs will have little impact on budget or forecast.Business fixed investment and some strength in the housing market, mainly multi-family.
Growth Picks Up
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
06 08 10 12 14 16 18 20
1997-2007 3.2%
GROSS DOMESTIC PRODUCT
Actual Forecast
Source: BEA and IHS
GDP2011Q3=2007Q4
2016 1.5%2017 2.3%Forecast2018 2.8%2019 2.8%2020 1.9%
Components of GDP are:
GDP = Consumption (69%)
Investment (17%)
Government (18%)
Net Export (-4%)
ConsumptionAs previously mentioned, consumer
fundamentals looks strong.
Projected growth is at 2.4% through 2020.
University of Michigan’s Consumer Sentiment and the Conference Board’s Consumer Confidence Index remain close to historical highs.
Deleveraging Plateaus
0%2%4%6%8%
10%12%14%16%18%
50%60%70%80%90%100%110%120%130%140%
70 75 80 85 90 95 00 05 10 15
PersonalSavingRate
HH DebtDisp IncRatio
HOUSEHOLD DEBT AND SAVING RATE
Source: BEA and FED
133%
80%60%
Record Low Debt Service
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
13.0%
13.5%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
13.0%
13.5%
1990 1995 2000 2005 2010 2015
HOUSEHOLD DEBT SERVICEAS % OF DISP. PERS. INC.
Source: BEA
Slower Growth Ahead
-6%
-4%
-2%
0%
2%
4%
6%
-6%
-4%
-2%
0%
2%
4%
6%
06 08 10 12 14 16 18 20
Actual Forecast
REAL CONSUMPTION
Source: BEA and IHS
1997-2007 3.7%
2016 2.7%2017 2.7%Forecast2018 2.4%2019 2.4%2020 2.4%
Investment SectorFixed business investment showing solid
growth. 2018 5.9% 2019 6.0% 2020 4.0%
Growth supported by TCJA and expanded expensing.
Low inventories in housing market will drive prices higher. Recent increases of 7.3%.
In spite of tight housing market, most upturn in multi-family housing.
Recovery Continues
0.4
0.8
1.2
1.6
2.0
2.4
0.4
0.8
1.2
1.6
2.0
2.4
06 08 10 12 14 16 18 20
ActualForecast
2016 1.18 mil2017 1.21Forecast2018 1.342019 1.412020 1.46
HOUSING STARTS
Source: US Census and IHS
Mill
ions
, Uni
tsM
illions, Units
Government Sector
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
2000 2005 2010 2015 2020 2025
EXPENDITURES
RECEIPTS
DEFICITS
FORECAST
FEDERAL GOVERNMENT AS % OF GDP
Source: IHS
Debt Held by Public
30%
40%
50%
60%
70%
80%
90%
100%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2005 2010 2015 2020 2025
FEDERAL DEBT HELD BY PUBLIC AS % OF GDP
FORECAST
Source: IHS
Debt held by ind, corp, s&l govtforeigners, and Fed Res Syst
The balance ownedby intergovt holdingssuch as Soc Sec
Foreigners holdabout 47% ofpublicly helddebt
The Fiscal Picture
The CBO projects real GDP growth at 1.9% through 2028. The contribution of TCJA is only about 0.06 percentage point per year.
In other words, they do not see that the TCJA will significantly spur growth or recoup the cost of tax cuts.
IHS Markit has accepted the CBO forecast.
Foreign SectorThe $ is expected to strengthen over the next four quarters driven by the need to finance expected deficits due to recent legislation.
World real GDP growth will peak at 3.4% in 2018 and slow to 3.3% in 2019 and 3.1% in 2020.
The major change in the May report is that both imports and exports of petroleum will be higher over the 2018-2020 period.
Employment & UnemploymentSolid gains in employment will be driven by
robust growth in production.
This strong growth will boost both wage growth and inflation pressures.
The employment cost index expected to increase 3.0% in 2018 and rise to 3.5% by 2021.
The unemployment rate averaged 4.4% in 2017. IHS projects 3.9% in 2018, 3.5% in 2019, and 3.7% in 2020.
Employment Growth
-1,000
-800
-600
-400
-200
0
200
400
600
-1,000
-800
-600
-400
-200
0
200
400
600
2006 2008 2010 2012 2014 2016
CHANGE IN NONFARM EMPLOYMENT
Source: BLS
Thou
sand
s Thousands3 Month Average +208,000
Future Job Growth Steady
-8%
-6%
-4%
-2%
0%
2%
4%
06 08 10 12 14 16 18 20
NONFARM EMPLOYMENT
Source: BLS and IHS
Actual Forecast
1997-2007 1.1%
2016 1.8%2017 1.5%Forecast2018 1.6%2019 1.5%2020 0.8%
Low U3 Unemployment Rate Still Falling
3%
4%
5%
6%
7%
8%
9%
10%
3%
4%
5%
6%
7%
8%
9%
10%
06 08 10 12 14 16 18 20
Actual Forecast
UNEMPLOYMENT RATE
Source: BLS and IHS
1997-2007 4.9%
U6=7.8%Avg U 23.1 wksU>27 wks 20.0%
2016 4.9%2017 4.4%Forecast2018 3.9%2019 3.5%2020 3.7%
Labor Participation Rate Still Low
62%
63%
64%
65%
66%
67%
68%
62%
63%
64%
65%
66%
67%
68%
1990 1995 2000 2005 2010 2015
LABOR FORCE PARTICIPATION RATE
Source: BLS
Tight Labor Market
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
06 08 10 12 14 16
Job Openings
Unemployed
LABOR MARKET CONDITIONS
Source: BLS
Tho
usan
dsT
housands
Inflation & Interest RatesThe FED will increase the Federal Funds rate four
times in 2018. Post-2018, they will increase the Federal Funds rate to 3.5% by 2020.
IHS Markit estimates the NAIRU at 4.6%. Therefore, they see the core PCE inflation rate at 2.3% by 2020.
Factors contributing to higher interest rates are the FED, FED balance sheet shrinkage, and higher inflation premia.
They see higher interest rates as a negative for equity valuation and expect little cumulative gains in the broad indexes over the next couple of years.
Still Very Low
-12%
-8%
-4%
0%
4%
8%
-12%
-8%
-4%
0%
4%
8%
06 08 10 12 14 16 18 20
INFLATION: CPI
1997-2007 2.6%
ActualForecast
Source: BLS
2016 1.3%2017 2.1%Forecast2018 2.5%2019 1.8%2020 2.5%
MAJOR RISKS
Loss of confidence leading to fall in fixed residential and nonresidential investment and expansion ends in 117th month just short of 120 month record. The business sector seeing this weakness cuts back on spending on equipment, etc. (20%)
Variable 2016 2017 2018 2019 2020 GDP 1.5% 2.3% 2.8% 2.8% 1.9%
Recession Probability 20%
NA Emp 1.8% 1.5% 1.6% 1.5% 0.8%
Oil(Brent) $44 $55 $70 $67 $69
Housing 1.18 1.21 1.34 1.41 1.46
CPI 1.3% 2.1% 2.5% 1.8% 2.5%
Un Rate 4.9% 4.4% 3.9% 3.5% 3.7%
IHS MARKIT FORECAST MAY 2018
Wells Fargo ForecastMay 2018
2017 2018 2019
GDP 2.3% 2.9% 2.8%
NA EMP 182 thou 178 thou 153 thou
CPI 2.1% 2.5% 2.3%
10-YR T Note 2.33% 2.99% 3.40%
Key Variables Tracking SD Economy
Nonfarm employment
Housing starts
Real nonfarm personal income
Taxable sales
Leading indicator
Pick Up
150,000
145,000
140,000
135,000
130,000
125,000
460
440
420
400
380
05 06 07 08 09 10 11 12 13 14 15 16 17 18
Thou
sand
s Thousands
Source: BLS
NONFARM EMPLOYMENT
SD
US
RatioScale
Job Loss P to TUS -8.7 mil -6.3%SD -12.7 thous -3.1%
SD RecessionBegins =>
2014 M04
2012 M02
Divergence
-6%
-4%
-2%
0%
2%
4%
6%
-6%
-4%
-2%
0%
2%
4%
6%
1990 1995 2000 2005 2010 2015
NONFARM EMPLOYMENT
US
SD
SF
RC
Source: BLS
ECONOMY AT A GLANCE(Employment Y/Y) MARCH
INDUSTRY SD SF RCTotal NonFarm 1.5% 0.9% 2.3%Min,log,const 0.4% 4.0% 2.2%Manufacturing 5.6% 3.6% 0.0%Trade,tran,util -0.7% -1.6% 3.8%Information -1.7% -3.8% 0.0%Finance 1.7% 0.0% 2.6%Prof,business 3.2% 2.0% 3.8%Educ,health 1.8% 1.3% 2.5%Leisure,hosp 0.6% 0.0% -1.1%Other services 1.2% 3.4% 0.0%Government 1.5% 2.1% 3.5%
SF Outpaces the Rest
200
180
160
140
120
100
80
200
180
160
140
120
100
801990 1995 2000 2005 2010 2015
SF
US
SD
RC
Growth1990-2017US=1.1%SD=1.6%SF=2.5%RC-1.6%
RatioScale
Source: BLS
NONFARM EMPLOYMENT
Recent Slowing
8,0007,5007,0006,5006,000
5,500
5,000
20
21
22
23
24
25
06 08 10 12 14 16
Tho
usan
dsT
housands
Source: BLS
CONSTRUCTION EMPLOYMENT
RatioScale
SD
US
Negative Growth
-20%-16%-12%-8%-4%0%4%8%
12%16%
-20%-16%-12%-8%-4%0%4%8%12%16%
2006 2008 2010 2012 2014 2016
Source: BLS
CONSTRUCTION EMPLOYMENT
SDSF
US
RC
% Change y/y
Some Growth
0100200300400500600700800900
0100200300400500600700800900
2006 2008 2010 2012 2014 2016
Total, SD
Single, SD
Uni
ts
SD Building Permits, Total & Single
12 Month Moving Average
Source: Census Bureau
Which is More Cyclical?
72
68
64
60
56
380370
360
350
340
330
320
2006 2008 2010 2012 2014 2016
Service EmploymentRight Scale==>
RatioScale
Goods Employment<==Left Scale
Thou
sand
s Thousands
SOUTH DAKOTA SERVICE AND GOODSPRODUCING EMPLOYMENT
Source: BLS
Goods-Producing = Manufacturing+Construction
SD Peaked Later and Decline Less Severe
300280
260
240
220
200
180
160
300280
260
240
220
200
180
16006 08 10 12 14 16
SDUS
RatioScale
1991
=100
1991=100
Source: FHLB
House Price Index
On the Uptick
14,50014,00013,50013,00012,50012,00011,50011,000
4644
42
40
38
36
2006 2008 2010 2012 2014 2016
MANUFACTURING EMPLOYMENTTh
ousa
nds Thousands
Source: BLS
RatioScale
SD
US
MFG %US 8.9%SD 9.4%SF 9.3%
Divergent Growth
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
06 08 10 12 14 16
US
SDSF
RC
MANUFACTURING EMPLOYMENT
Source: BLS
SD More Volatile
8,600
8,400
8,200
8,000
7,800
7,600
27
28
29
30
31
32
06 08 10 12 14 16
RatioScale
Tho
usan
dsT
housands
Source: BLS
SD
US
P to TUS -8.5%SD -13.0%
Fin %US 5.8%SD 6.7%SF 10.6%
FINANCIAL ACTIVITY EMPLOYMENT
Note SD and SF Different Than US
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2006 2008 2010 2012 2014 2016
FINANCIAL ACTIVITY EMPLOYMENT
Source: BLS
SD
US
SF
% Change y/y
US 3.9% SD 3.4% SF 3.1% RC 3.7%
2%3%4%5%6%7%8%9%
10%11%
2%3%4%5%6%7%8%9%10%11%
06 08 10 12 14 16
US
SDSF
RC
1997-2007US=4.9%SD=3.2%
U6US=7.8%SD=6.4%
UNEMPLOYMENT RATES
Source: BLS
Real Growth But Slower
$15,000
$14,000
$13,000
$12,000
$11,000
$38
$36
$34
$32
$30
$28
$26
2006 2008 2010 2012 2014 2016
RatioScale
Bill
ionsB
illions
Source: BLS
NONFARM PERSONAL INCOME (2009 $S)
SD
US
P to TUS -2.8%SD -1.1%
US and SD Track
-6%
-4%
-2%
0%
2%
4%
6%
8%
2006 2008 2010 2012 2014 2016
SD
US
REAL NONFARM PERSONAL INCOME(Year-Over-Year Percent Change)
Souce: BEA
Farm Down Sharply –Low Prices
$40
$60
$80
$100
$120
$140
$0
$1
$2
$3
$4
$5
2006 2008 2010 2012 2014 2016
Bill
ions
Billions
SD
US
Source: BEA
FARM INCOME
5 Year Avg% of PIUS = 0.7%SD = 7.2%
Way Below Average
$0.0$0.5$1.0$1.5$2.0$2.5$3.0$3.5$4.0$4.5
$0.0$0.5$1.0$1.5$2.0$2.5$3.0$3.5$4.0$4.5
06 08 10 12 14 16
Source: BEA
2005-2017Average
SOUTH DAKOTA FARM INCOME
Bill
ions
Billions
Recent Uptick
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
2006 2008 2010 2012 2014 2016
Large Projects=>
% Change y/y = +4.2%
12-MonthMoving Average
SD TAXABLE SALES
Source: SD Department of Revenue
Big Project =>a Year Earlier
Recent Pickup
$2.0B
$1.8B
$1.6B
$1.4B
$1.2B
$1.0B
$2.0B
$1.8B
$1.6B
$1.4B
$1.2B
$1.0B2006 2008 2010 2012 2014 2016
RatioScale
SD Taxable Sales - Seasonally Adjusted
Source: SD Department of Revenue
12 Month Moving Average
Mar 2017 to Mar 2018 +4.2%
Mid-American States Leading Indicators - GOSS
March 2018 Index > 50 GrowthOverall 67.4New Orders 71.9Sales 72.7Delivery lead time 65.1Inventories 64.2Employment 62.9
More Optimistic Than Recent Reports
Goss Comments “In 2017, South Dakota ranked 49th in
the nation, and ninth in the nine-state region in terms of the export of goods. These exports supported approximately 9,500 jobs, directly and indirectly in the state. The state’s new export orders for March of 70.6 indicates that South Dakota exports remain very strong,” said Goss.
Conclusions
SD economy growing at slower pace
SF economy growing at faster rate
US economy growing slowly
20% chance of recession
The End
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