The State of the SD Economy

Presentation to the Governor’s Council of Economic Advisors

October 30, 2018Ralph J. Brown, Professor Emeritus of 

EconomicsUniversity of South Dakota

Outline of Presentation

Overview of US economy

US economy forecast - Macroeconomic Advisors by IHS Markit

SD economy

Summary & Conclusions

US ForecastMacroeconomic Advisors, By IHS MARKIT

Forecast – October 10, 2018

Real GDP

Consumption,

Housing Starts

Federal Budget

Interest Rates and Inflation

Good Growth 2018-2019

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

06 08 10 12 14 16 18 20

1997-2007 3.1%2009-2017 2.2%

GROSS DOMESTIC PRODUCT

Actual Forecast

Source: BEA and IHS

GDP 2011Q3=2007Q4

2016 1.6%2017 2.2%Forecast2018 2.9%2019 2.8%2020 2.0%

GDPGood growth in 2018 and 2019 at 2.9% and 2.8%, respectively. In 2020, growth slows to 2.0% and about 1.5% thereafter. Chance of recession 25%.Currently, supportive financial conditions and stimulative fiscal policy assure above-trend growth… for awhile. Next year, the waning effects of fiscal stimulus and higher interest rates will inevitably slow the economy first to 2% trend then below trend.Consumer spending will continue to contribute to growth with 2.6% in 2018 and 2.8% in 2019.Tariffs undermine domestic demand but potentially shift production towards the US. They expect the former to exceed the later. This is because the US does not produce many of the goods subject to tariffs.

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 2.6% in 2018, 2.8% in 2019, and 2.5% in 2020.

The newly-in-force tariffs are expected to shave one-tenth of a percentage point off growth in 2019, due to higher prices. Looking ahead, they expect average growth of 2.0% over the 2020-2022 period.

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 Debt

Disp 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%

80 85 90 95 00 05 10 15

HH DEBT SERVICE PAYMENTS AS % OFDISPOSABLE PERSONAL INCOME

Source: BEA and Federal Reserve System

Steady Growth Ahead

-4%-3%-2%-1%0%1%2%3%4%5%

-4% -3% -2% -1% 0% 1% 2% 3% 4% 5%

06 08 10 12 14 16 18 20

ActualForecast

REAL CONSUMPTION

Source: BEA and IHS

1997-2007 3.7%

2016 2.7%2017 2.5%Forecast2018 2.6%2019 2.8%2020 2.5%

Investment SectorFixed business investment showing solid growth

peaking in 2018.2018 7.0% 2019 4.8% 2020 3.5%

Growth supported by TCJA, energy-related drilling and expanded expensing. Some concern over uncertainty over tariff and trade issues.

Low inventory/sales ratio will drive inventory investment for the near term.

Current housing slump is temporary. Higher interest rates and a housing shortage at particular price points will slow growth but be offset by economic growth and higher household formation.

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 1.12 mil2017 1.21Forecast2018 1.272019 1.352020 1.43

HOUSING STARTS

Source: US Census and IHS

Mill

ions

, Uni

tsM

illions, Units

Government Sector

14%

16%

18%

20%

22%

24%

26%

14%

16%

18%

20%

22%

24%

26%

2000 2005 2010 2015 2020 2025

Receipts

Outlays

40 Year AverageReceipts

40 Year AverageOutlays

FEDERAL GOVERNMENT AS % OF GDP

BEA AND IHS

FORECAST

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% of publicly helddebt

The Fiscal PictureFederal budget deficits will rise from 3.6% of GDP in 2015 to 4.8% of GDP in 2018 and 5.0% by 2022 and remain above 5% of GDP throughout the 2028 forecast period.

In other words, IHS does not see that the TCJA will significantly spur growth after 2019 or recoup the cost of tax cuts.

Annual deficits will exceed $1 trillion by 2020. IHS projects the debt/GDP ratio rising to 79% in 2018 and 91% by 2025.

Foreign SectorThe $ is expected to strengthen over the next four quarters driven by the need to finance expected deficits and higher interest rates causing capital inflows. Also faster relative US growth supports imports at the expense of exports. According to IHS, new tariffs will have little impact on forecast, small change in PCE. The assumptions in their simulations are: 1. One-third of impact of tariffs is offset by resourcing them to other countries,2. Another one-third is offset by Chinese suppliers absorbing the cost of tariffs,3. US importers will compress margins,4. FED will stay course of gradual tightening keeping inflation in check.

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 unemployment rate averaged 4.4% in 2017. IHS projects 3.9% in 2018, 3.5% in 2019, and 3.6% in 2020.

One positive, is the expected upward drift in the labor force participation rate through mid-2020 reflecting a gradual unwinding of the “discouraged-worker” effects.

Employment Growth

-1,000

-800

-600

-400

-200

0

200

400

600

-1,000

-800

-600

-400

-200

0

200

400

600

1990 1995 2000 2005 2010 2015

CHANGE IN NONFARM EMPLOYMENT

Source: BLS

Thou

sand

s Thousands3 Month Average +211,000

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 1.6%Forecast2018 1.6%2019 1.4%2020 1.1%

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=7.5%Avg U 23.2 wksU>27 wks 22.7%

2016 4.9%2017 4.4%Forecast2018 3.9%2019 3.5%2020 3.6%

Increase Prime Working Age

62%

63%

64%

65%

66%

67%

68%

80%

81%

82%

83%

84%

85%

1990 1995 2000 2005 2010 2015

Prime Working Age (25-54)

LABOR FORCE PARTICIPATION

Age (16 and over)

BLS

Age

16

and

over A

ge 25-54

Job Openings > Unemployed

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 18

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.

Further Fed rate hikes, shrinkage in the Fed balance sheet, higher inflation premia, and higher rates abroad will push Treasury rates higher over the next few years, The 10-year Treasury note should rise to 3.57% by 2020.

They see the CPI rising to 2.6% in 2018, 2.4% in 2019, and 2.5% in 2020.

The PCE excluding food and energy increased 1.6% in 2017 and will rise to 2.1% in 2018 and 2.2% in 2019 and 2020.

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%Forecast

2018 2.6%2019 2.4%2020 2.5%

Variable 2016 2017 2018 2019 2020 GDP 1.6% 2.2% 2.9% 2.8% 2.0%

Recession Probability 25%

NA Emp 1.8% 1.6% 1.6% 1.4% 1.1%

Oil(Brent) $44 $55 $74 $81 $82

Housing 1.18 1.21 1.27 1.35 1.43

CPI 1.3% 2.1% 2.6% 2.4% 2.5%

Un Rate 4.9% 4.4% 3.9% 3.5% 3.6%

IHS MARKIT FORECAST OCTOBER 2018

Wells Fargo ForecastOctober 20182018 2019 2020

GDP 2.9% 2.8% 2.2%

NA EMP 201 thou 165 thou 120 thou

CPI 2.5% 2.8% 2.6%

10-YR T Note 3.00% 3.59% 3.96%

Key Variables Tracking SD Economy

Nonfarm employment

Housing starts

Real nonfarm personal income

Taxable sales

Leading indicator

Steady

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%

-4%

-2%

0%

2%

4%

06 08 10 12 14 16 18

NONFARM EMPLOYMENT

US

SD

SF

RC

Source: BLS

ECONOMY AT A GLANCE(Employment Y/Y) SEP

INDUSTRY SD SF RCTotal NonFarm 1.4% 1.7% 1.9%Min,log,const 7.8% 3.3% 3.8%Manufacturing 2.5% 4.3% 0.0%Trade,tran,util -0.6% -1.6% 0.7%Information 0.0% -3.8% 0.0%Finance 1.0% 0.0% 0.0%Prof,business 6.7% 8.8% 1.9%

Educ,health 0.3% 0.6% 2.5%Leisure,hosp 0.2% 1.3% 3.6%Other services 3.6% 3.4% 2.9%Government 0.6% 2.6% 0.9%

SF Outpaces the Rest

200180

160

140

120

100

80

200180

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

Still High

8,000

7,000

6,000

5,500

5,000

20

21

22

23

24

25

06 08 10 12 14 16 18

Tho

usan

dsT

housands

Source: BLS

CONSTRUCTION EMPLOYMENT

Ratio

ScaleSD

US

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 2018

Source: BLS

CONSTRUCTION EMPLOYMENT

SDSF

US

RC

% Change y/y

Steady

0100200300400500600700800900

0 100 200 300 400 500 600 700 800 900

2006 2008 2010 2012 2014 2016 2018

Total, SD

Single, SD

Uni

tsSD Building Permits, Total & Single

12 Month Moving Average

Source: Census Bureau

Which is More Cyclical?

72

68

64

60

56

380 370 360

350

340

330

320

2006 2008 2010 2012 2014 2016 2018

Service EmploymentRight Scale==>

RatioScale

Goods Employment<==Left Scale

Thou

sand

s Thousands

SOUTH DAKOTA SERVICE AND GOODS PRODUCING EMPLOYMENT

Source: BLS

Goods-Producing = Manufacturing+Construction

SD Peaked Later and Decline Less Severe

300280

260

240

220

200

180

160

300 280

260

240

220

200

180

160 06 08 10 12 14 16 18

SDUS

Ratio

Scale

1991

=100

1991=100

Source: FHLB

House Price Index

High Level

14,500

13,50013,00012,50012,00011,50011,000

46 44 42

40

38

36

2006 2008 2010 2012 2014 2016 2018

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 18

US

SDSF

RC

MANUFACTURING EMPLOYMENT

Source: BLS

SD Very Flat

8,8008,6008,400

8,200

8,000

7,800

7,600

27

28

29

30

31

32

06 08 10 12 14 16 18

Ratio

Scale

Tho

usan

dsT

housands

Source: BLS

SD

US

P to T

US -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 2018

FINANCIAL ACTIVITY EMPLOYMENT

Source: BLS

SD

US

SF

% Change y/y

US 3.7% SD 3.0% SF 2.3% RC 2.8%

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 18

US

SDSF

RC

1997-2007US=4.9%SD=3.2%

U6US=7.5%SD=6.2%

UNEMPLOYMENT RATES

Source: BLS

Real Growth

$17,000$16,000

$15,000

$14,000

$13,000

$12,000

$11,000

$40

$36

$32

$28

2006 2008 2010 2012 2014 2016 2018

RatioScale

Bill

ions

Billions

Source: BLS

NONFARM PERSONAL INCOME (2009 $S)

SD

US

P to TUS -2.8%SD -1.1%

US and SD Track

-4%

-2%

0%

2%

4%

6%

8%

2006 2008 2010 2012 2014 2016 2018

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

2006 2008 2010 2012 2014 2016 2018

Bill

ions

Billions

SD

US

Source: BEA

FARM INCOME

5 Year Avg% of PIUS = 0.7%SD = 7.2%

Way Below Average

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

06 08 10 12 14 16 18

Source: BEA

2005-2017

Average

SOUTH DAKOTA FARM INCOMEB

illio

nsB

illions

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 2018

Large Projects=>

% Change y/y = +8.1%

12-Month Moving 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

$1.0B 2006 2008 2010 2012 2014 2016 2018

RatioScale

SD Taxable Sales - Seasonally Adjusted

Source: SD Department of Revenue

12 Month Moving Average

Sep 2017 to Sep 2018 +8.1%

HOW IS SD DOING?

SD is Gaining on US

$52,000

$48,000

$44,000

$40,000

$36,000

$32,000

$28,000

$52,000

$48,000

$44,000

$40,000

$36,000

$32,000

$28,0002000 2005 2010 2015

REAL GDP PER CAPITA

Source: BEA

US

SD

Cost-of-Living Adjusted Real GDP

$56,000

$54,000

$52,000

$50,000

$48,000

$46,000

$56,000

$54,000

$52,000

$50,000

$48,000

$46,0002008 2010 2012 2014 2016

REAL GDP ADJUSTED FOR RPP

RPP is measureof cost-of-living

SD

US

Source:BEA

116%

108%

106%

Mid-American States Leading Indicators - GOSS

2018 Index > 50 Growth - SeptemberOverall 50.4New Orders 54.6Sales 50.1Delivery lead time 48.7Inventories 49.0Employment 49.7

Goss Comments

“Over the past 12 months, according to U.S. Bureau of Labor Statistics data, South Dakota employers increased the hourly work week by 0.4 percent, equal to the regional median, and average hourly pay by 4.1 percent, which was well above the regional median,” said Goss.

Conclusions

SD economy growing at slower pace

SF economy growing at faster rate

US economy growing nicely

25% chance of recession

The End