Thursday, January 31, 2008

A little insight into the state recession story 

It appears that the state economist, Tom Stinson, has his eyes focused on the housing sector as the indicator of state recession.

Speaking Tuesday at an event sponsored by Minnesota Council of Nonprofits, Stinson pointed to slumping housing starts in the fourth quarter of 2007 and other measures indicating the state economy is less healthy than the national economy. Earlier this month, Stinson asserted the state is in a recession.

Stinson said Global Insight, the company the state uses in putting together its projections, was less optimistic in its January outlook than it had been in its November forecast.

Even after the Federal Reserve cut a key interest rate by three-fourths of a percentage point last week to stimulate the economy, Global Insight "reiterated their pessimistic outlook," Stinson said.

Stinson said some hints might emerge after December sales tax revenue, which will reflect holiday spending, and some January income tax figures become available in a few days.

Global Insights has already insisted that the recession is baked into the cake, so Stinson is following his modelers. GI had a January forecast for GDP growth for fourth quarter 2007 near zero (vs. the 0.6% announced yesterday) and is below the WSJ consensus for all four quarters. Its scenarios given to the state Council of Economic Advisors has a weight on "recession" scenario of 40%. Some of Stinson's alleged pessimism comes from GI.

The only marker I have on the state housing market and its impact on the budget would be the deed and mortgage transfer tax projections. They are currently running 5% above projections. So that isn't it. We get a second clue in a piece of an interview he gave to PBS:
This time, it looks to me like we're going to be affected a little bit more than the national average. This recession is led by a housing problem. And Minnesota's economy has the usual amount of construction. But the lumber and wood products industry is still an important part of Minnesota's economy.
And yet agriculture, forestry, fishing and hunting together contributed only 0.13% to the 2.9% growth in Minnesota in 2006 (the last year for which we have data.) True, wood product employment is down sharply, but that's about a 2,400 job loss in a 2,800,000 job economy. Do we forecast an entire state based on a sector that is half of one percent of state employment? The same would be true of residential construction employment.

Stinson does offer some advice to our local leaders who think the word recession calls for stimulus from state government:

"There isn't a lot that state governments can do in terms of stimulus," Stinson told an audience assembled Tuesday by the Minnesota Budget Project, an arm of the Council of Nonprofits. State government simply can't keep up with the feds when it comes to giving the economy a "timely, targeted and temporary" boost -- the test Stinson endorsed for a worthwhile stimulus strategy by government. The Minnesota share of the stimulus package approved by the U.S. House Tuesday will likely exceed $2.5 billion -- orders of magnitude larger than anything the Legislature, with its balanced budget requirement, can afford to spend this year.

A capital investment bonding bill is often touted as the 2008 Legislature's chance to pump money quickly into the economy. But building projects don't ramp up that fast, Stinson said. Typically, only 15 percent of a project's authorized spending occurs in the first year. "Years two and three are the big spending years," he said.

By which time the recession should be over, and thus that spending would have the potential to overstimulate.

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