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Slow economic growth, weak global markets challenge Midwest states

by Tim Anderson ~ 2016 MLC Annual Edition ~ Stateline Midwest »
The Midwest, long reliant on manufacturing and agriculture to power its economy, is facing a mix of global conditions that will likely mean continued slow growth for the foreseeable future, regional economist Rick Mattoon warned state legislators in July.
Add in the increased volatility of personal income tax collections (a key source of state revenue), he said, and the time seems right for legislative caution on state budgets.
“The best policy hedge [against volatility and limited growth] is to carry a higher rainy-day fund,” Mattoon, a senior economist and economic adviser for the Federal Reserve Bank of Chicago, said to legislators who attended this year’s Fiscal Leaders Roundtable at the Midwestern Legislative Conference Annual Meeting.
Typically, fiscal leaders and economists have recommended end-of-year balances of 5 percent.
But Mattoon suggested that legislators aim higher than that, given the year-to-year unpredictability of non-wage income (capital gains, for example) and the fact that it has become a bigger part of the revenue mix in most states.
John Hicks, executive director of the National Association of State Budget Officers, said in his presentation to legislators that many states already have begun to tweak their fiscal policies.
“Even though revenue growth hasn’t been strong, we have been putting more into our savings accounts,” he noted about trends during this decade. For fiscal year 2016, Indiana, Iowa, Minnesota, Nebraska, North Dakota and South Dakota were estimating end-of-year balances near, at or above 10 percent.
Some states are enacting additional budget policies to deal with the revenue volatility; in Minnesota, for example, the state now conducts “stress tests” to evaluate whether its amount of budget reserves is sufficient.
According to Mattoon, most forecasts point to the U.S. economy plodding along in 2017, at a growth rate of about 2 percent. While the United States arguably has the strongest economy in the world right now, he said, “it doesn’t feel that way” because of consistently slow growth since the Great Recession.
That growth has been even more tepid in much of the Midwest, at least according to one measure of economic activity used by the Federal Reserve (see map). Looking ahead, weak foreign markets will be a challenge for the region’s manufacturers, while the record profits for U.S. farmers in 2012 are becoming a distant memory.
“That industry mix is a challenge for the Midwest. ... If you’re selling in the world right now, you have to say, ‘Who is your trade partner?’” noted Mattoon, highlighting slower growth in China as well as Europe’s stagnant economy (even before Brexit).
Lower corn, soybean, milk and hog prices are putting major pressures on agriculture producers, and a stronger U.S. dollar is putting a strain on all of the nation’s exporters. But Mattoon said there are positive signs as well, perhaps notably the drop in employment rates and the rise of jobs in higher-wage sectors.