MEET THE EXPERT:
Dan White is a Senior Economist at Moody’s Analytics, responsible for coordinating government consulting and regional economic research with an emphasis on fiscal policy. He regularly presents to clients and conferences, and has been featured in a number of print, radio, and televised media outlets, ranging from the Wall Street Journal to National Public Radio. He also has the pleasure of working closely with a number of governments in a consulting role.
How long will it realistically take during 2017 for the new administration’s policy changes to affect GDP growth?
Growth can be affected in 2017, but that effect will come more from the anticipation of policy changes than any direct policy changes themselves. For example, financial markets are already beginning to price in some fiscal stimulus from the incoming administration, and that has dramatically pushed up long-term interest rates. Higher long-term rates will weigh on the pace of growth as early as the first half of 2017.
How likely do you think it is that the economy in 2017 deviates from the fairly consistent recent GDP growth rate of around 2%, either to an even lower growth level or a higher pace?
I think if anything growth could come in slightly below 2%. This is because of the effects I mention above, but also because of some of the direct policy changes that could come into effect by the end of 2017. For example, any new tariffs or other trade restrictions as well as anything that slows the pace of immigration into the U.S. could happen more unilaterally and thus quickly.
These all have the potential to come into effect before any proposed tax cuts or spending increases - which could otherwise push us above 2% - make their way through Congress.
The chances of a recession are considered fairly low currently. Do you consider the likelihood of this happening to be increasing or decreasing? If one were to happen, what would be the most likely cause or trigger?
I agree that the odds of recession in the next year are relatively low. The most popular narrative for the next recession had been the potential for the Federal Reserve to wait too long to begin raising interest rates. Under such a scenario, inflation could have eventually gotten out of control and forced the Fed to raise rates very quickly, thus inverting the yield curve and sending us into recession. Given what’s happened to long-term rates since the election, and the potential stimulus measures on the horizon, it should be a bit easier for the Fed to be aggressive normalizing monetary policy so this risk is diminished.
What do you expect the fiscal environment for state and local governments to look like?
I expect the next several years to be very tough sledding for states and local governments in terms of budgeting and spending, and that was going to be the case regardless of who won the election.
1) Tax Revenue Challenges. We continue to see a clear disconnect between what’s going on in the economy and what’s coming in the door in terms of tax revenues.
For example, even though we’ve seen a slight acceleration in GDP growth, state tax revenue growth has actually declined for four consecutive quarters. In fact, the most recent quarter for which we have data shows an outright year over year decline in state tax revenues. This disconnect is a result of both structural changes to state and local tax policy as well as some one-time unique dynamics, and it will continue out into the future, making life difficult for revenue forecasters.
2) Spending Pressures. Aside from revenues, spending pressures will continue to mount as well. In terms of pensions and other worker benefits, even governments with relatively healthy funded ratios are going to see more stress put on them as they transition to a world with more retirees collecting benefits and fewer workers paying into pension systems. What’s more, at the state level, Medicaid will continue to grow at a faster pace than revenues. This will continue to crowd out discretionary spending, and again make putting together a budget a lot more difficult.
How can state and local agencies factor infrastructure stimulus spending into their planning and budgeting?
The biggest thing to understand about new infrastructure funding is the importance of public private partnerships or P3s. The new administration hasn’t, at least publicly, fleshed out its plans in a very detailed way. However, it has made it abundantly clear that it wants the private sector to play a significant role. Those governments who best understand how to take advantage of P3s will be ahead of the curve once a bill is put into place.
What do you see as the implications of a Trump presidency on federal grants and transfers to states?
The biggest impact on grants and aid from the federal government will likely come in Medicaid. It appears most likely that Medicaid will be transformed into some type of block-grant in the not so distant future, and this carries with it a unique set of risks. Fortunately, those risks are balanced and depend largely on how the block-grant is structured. States will in all likelihood receive less federal assistance to administer their Medicaid programs, which is the bad news. The good news, however, is that states will have an extraordinary amount of freedom to implement their programs.
This will allow more states to get creative in ways to pay them without potentially crowding out more discretionary spending. The biggest downside risk is what happens during a downturn in the business cycle. Most likely this would occur after state Medicaid allotments have been set, leaving states in a precarious position without some type of stabilizing mechanism in place.
This article appeared originally in Onvia's 2017 State & Local Government Contracting Forecast. Request your complimentary copy of the report below.