With Trump, Fairer Weather May Be Blowing This Way

Printed from: https://newbostonpost.com/2017/01/20/with-trump-fairer-weather-may-be-blowing-this-way/

BOSTON — New England wasn’t in Donald Trump’s corner in November but the region may benefit from the new president’s policies, regional economists said this week.

The performance of all New England states varies over time but they often move in sync. The bottom-line consensus from this week’s meeting of economists is that the region’s economy may improve if Trump gets Congress to approve his program of increased spending on defense and infrastructure and corporate tax reform that can repatriate overseas profits. Such profits could translate into domestic capital investment.

Still, when it comes to economic forecasting, the Trump era is forcing a sense of modesty in most projections. The thoughtful, two-handed band of economists at the New England Economic Partnership Outlook Conference this week were asked to answer the Big Question: “What’s Ahead after this Historic Election?”

Indeed, there was much of the “on the one hand” waving served with an expected “boatload of uncertainty.” The consensus hedged on trying to explain the “known unknowns” of the change in Washington.

New England Economic Partnership is a non-partisan group of economists from business, academia, and government who meet regularly at the Boston Federal Reserve Bank in Boston to estimate the future path of the United States and regional economies. While economists were stunned with the election results, they noted that the economic outlook for New England is far from dismal. Trump is pro-business and that might guarantee the continued path of 2 percent to 2.5 percent growth, with a recession possibly kicking in at the end of his first term.

“It’s not a game changer but it’s good and I’ll take it,” said Mark Zandi of Moody Analytics, who provides a national overview each year. “We need it.”

Massachusetts, which drives the region’s economic train with its low jobless rate, will remain the envy of other high tech states — faced with a few problems other states would welcome. “The labor constraints on growth are going to affect our ability to attract major new employers and allow existing firms that want to expand operations,” noted one economist. But that outwardly pessimistic view hides the fact that there’s little slack in the Massachusetts economy and workers are doing well.

The December unemployment rate in Massachusetts rang in at 2.8 percent according to the state’s Executive Office of Workforce and Labor Development. The U.S. rate is 4.7 percent.

Zandi noted the United States has regained ground lost in the Great Recession that broke in 2007 and ignited only a slow-moving recovery since then. Zandi also noted that Trump will find the economy in great shape when he walks through the doors of the White House. Unemployment is down. Workers are so confident they can find new jobs that the quit rate is increasing and layoffs are decreasing. The number of workers filing for unemployment benefits is “about as low as it can go,” said Zandi. Wages are growing at a healthy 2 percent per year clip. “Broadly speaking, the U.S. economy is on fundamentally strong ground,” he summarized.  He also pointed to a rebounding post-election stock market.

There are some longstanding problems puzzling economists, namely the lower labor force participation rate and sluggish, below post-World War II average gross domestic product and productivity growth. Moreover, it is unclear whether applying fiscal stimulus (as Trump wants) during periods of low unemployment will produce a worthwhile multiplier effect. Monetary policy is tapped out, with the Federal Reserve Bank determined to raise interest rates after years at zero-bound.

The soon-to-be announced fiscal policies of the Trump administration, particularly personal and corporate tax cuts, defense spending, and infrastructure spending, will provide at least a short-term boost from Maine to Connecticut. Changes to the Affordable Care Act (“Obamacare”) could cause problems for New England where health care spending comprises a large part of state budgets.

“The future of Obamacare and the possible loss of federal support for the state’s public health care programs is a big concern for state policy makers and the state budget,” said Alan Clayton-Matthews of Northeastern University.

Added to that are worries about the aging workforce and other demographic pulls such as outmigration.

Economists were also worried about Trump’s trade protectionism with the prospect of restraints on immigration, which the region needs for expected labor shortages in the future. When it comes to trade, economists almost universally believe that lower barriers are beneficial. But at NEEP most believe that President Barack Obama’s Trans Pacific Partnership push is dead, thus foreclosing trade opportunities for services-exporting states like Massachusetts that want access to global markets.

Immigration is viewed a net positive by all of the NEEP forecasters. “If you want to pick a policy to go from 2 percent to 3 percent or 3 percent to 4 percent, the single best way to get there is immigration,” said Zandi.

 

Massachusetts Pulls the New England Train

Although employment growth has slowed slightly, Massachusetts is nearing full employment and the labor force participation rate has generally returned to pre-recession levels.

“Corporate tax reform in particular could boost spending in Massachusetts and could play a role with more money to invest,” says Clayton-Matthews, who annually contributes a Massachusetts forecast for the conference. Other inputs such as defense spending and spending on infrastructure will stimulate the economy.

The state’s gross domestic product is expected to grow slightly slower than the national average but that’s because the Bay State’s population might not be growing as fast as the nation’s rate. But the workers here who are gainfully employed will see higher wages as employers bid up compensation.

“Tight labor markets are good for wages,” notes Clayton-Matthews in his report. “Consequently, wage and salary income is expected to rise faster than employment and inflation.”

And it is not just wages — total income, which includes non-wages, is expected to grow on average 5.2 percent over the forecast period between 2017 and 2020.

NEEP expects Massachusetts payroll employment to grow at an average of 1.1 percent per year through calendar year 2020. Assuming the absence of a negative shock, unemployment rates will stay under 4 percent through 2020.

Expect to see more job sites and construction cranes dotting the skylines and the suburbs. Construction jobs are expected to grow by 3 percent per year.

Following that sector are professional and business services (think high-tech and biotech), leisure and hospitality (think boutique hotels and more tourism), and education and health care (always a Bay State super sector). All are expected to grow between 1.5 percent and 2.0 percent. (See chart.)

The government, information, and trade-transport-utilities and “other services” are slated to grow more slowly.

Energy and labor-intensive manufacturing are expected to further decline over the next few years — the most certain reality of the service-based, high-tech Massachusetts economy.

Source: Alan Clayton-Matthews, New England Economic Partnership

 

“However there are things to worry about like changes in the health care,” said Clayton-Matthews. “We are expecting $29 billion in the next five years under Obamacare. It is uncertain how much of that will be available.”

An emerging question will be how willing would state legislators be to cover the gap caused by less federal spending in Trump’s first budget.

What worries labor economists in Massachusetts is the composition and prospective growth of the work force. The aging of the baby-boom generation motif is by now cliché, but it’s also overwhelming for a state like Massachusetts with its $435 billion skills-based economy.

In 2015, millennials arrived in the Bay State, reversing a trend. The cohort numbers for ages 15 to 29 was mostly positive. That’s good, said Clayton-Matthews, pointing to a net domestic in-migration of the 20-24 age group in 2015.

In contrast, Massachusetts tends to lose people who are graying. In 2015, residents ages 30 to 65 and over were leaving the state. The question is:  will millennials stay?  If not, the state will need immigrant labor — a topic which escalates into heated debate, in no small part because of the incoming president’s posturing on the issue.

“Immigration policy is another big ‘if’,” said Clayton-Matthews. “We are highly depending on growing our labor force.”

Massachusetts remains at the center of the New England economy. Few of the other five states approach its ability to generate high-wage jobs or match its diverse strength across sectors.

Vermont, which is doing well, faces in-migration labor problems and a growing dependence on federal dollars. Rhode Island and Connecticut (once the headquarters of General Electric) face structural problems such as business retention. Maine will not recover the lost jobs of the Great Recession until 2018.

New Hampshire may have the lowest unemployment rate in the nation at 2.7 percent (November 2016). But its annual growth will also slow below the U.S. average by 2018 and the superior performance is uneven throughout the state. (As is the case with Massachusetts west of Route I-495.) New Hampshire’s strength lies in its interdependence with the Boston metropolitan area.

Still, the temper of the times is clearly historic for local economists.

“We’re talking about stimulating an economy at full employment, folks!” exclaimed Jeffrey Carr of Economics and Policy Resources Inc. of Vermont, in one of the more poignant remarks of the day.

 

Frank Conte, editor and publisher of EastBoston.com, writes regularly about economics and public policy.

 

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