Vermont Economy Forecast: Continues Slow Growth

Vermont Economic Outlook ConferenceFor the 22nd year, economists Art Woolf and Dick Heaps of Vermont Economy Newsletter are forecasting where the state’s economy is headed at their annual Vermont Economic Outlook Conference in Burlington.

As in past conferences a succession of speakers, including Woolf and Heaps are analyzing recent economic trends with an eye toward what will happen over the next 12 months.

“Slow Growth As Far As The Eye Can See” is the takeaway.

Gus Faucher began with a presentation on the U.S. economic outlook at what that means for Vermont.  Faucher is an economist who worked for the Treasury Department and is now with PNC Financial Services Group.

A hallmark of much of the post-recession economic growth has been a lack of job growth, but Faucher says that is ending.  He says in 2013 the economy will continue to grow and jobs will be added, particularly during second half of year.  Among the reasons Faucher gives:

  • Productivity is flat, so if firms need to keep up with increasing consumer demand, they’ll have to hire more workers.
  • Profitability is up, which is another incentive for businesses to hire and firms have cash on hand to finance investment and hiring.
  • American consumers have reached an all time low in debt.

Short term interest rates are expected to stay low for the foreseeable future.

Weighing the factors that will act to stifle economic growth, Faucher pointed to the social security payroll tax, observing that “all the fight” in Congress over the fiscal cliff was about higher income tax increases, but the widespread impact of increasing the payroll tax is going to have a larger impact by  moderating consumer spending.  “We’re going to start to see that pretty darn soon,” Faucher says.

“I think the idea of a debt limit is stupid,” Faucher says, but Congress must raise it or the impact will be devastating.

He also suggested that continued economic problems overseas will weaken growth of American exports.

Faucher expects unemployment to continue to drop and the U.S. economy to grow by about 2.5 percent by the end of 2013, accelerating in 2014.  “That’s when people will start feeling really good about the economy,” he says.

Looking at Vermont Faucher pointed out that Vermont’s recession was ‘milder’.  “The Vermont economy tends to be more stable than the national economy,” he explains, because Vermont businesses are less cyclical and less susceptible to the economic winds.

“The first thing that struck me is the Vermont population growth declined in 2012.  That’s going to be the key issue for Vermont,” he observes. “How do you get stronger, longer population growth? How do you keep the young people that employers are looking for? It’s a chicken and egg problem, if you don’t have the population growth you can’t attract employers.”

Faucher says a tendency for businesses to locate in lower tax states is a problem for the  Northeast.  He says it’s a issue states like Vermont must tackle in the long term.

In response to a question about the economic impact of Obamacare, Faucher says the Affordable Health Care Act may be a slight negative for the economy in 2013, due to taxes on unearned income.  Over the longer term, he says, “It’s basically going to be a wash for economic growth.  We’re going to have a slight tax increase, but there may be productivity gains through having more portable health insurance.”  This could allow people to change jobs more easily and find positions that best use their skills, instead of basing their decisions on health insurance.

Following Faucher’s overview of U.S. economic trends, Vermont economist Dick Heaps told the gathering that  If we see Vermont departing from national economic trends, it would mean we differ is some substantial way, he says. Do we?  Heaps says the difference is our demographics. “It’s the biggest thing that the [Vermont] economy is facing in the near term future and what makes us different from the national economy.”

We have about 300,000 payroll jobs in Vermont plus perhaps 40-50,000 self employed individuals.

“When can we finally put our last recession to bed?” Heaps asked the group.  In terms of number of jobs, he says Vermont is 2% below peak employment levels four years ago.  “We’re inching toward recovering all of our jobs,” he declared.

Breaking down 2012 job growth figures, Heaps explains that the public sector lost 850 jobs in the past 12 months while the private sector gained about 3,500 jobs.

Most of public sector job losses were in local schools, he says, adding the numbers are justified by the declining enrollment in Vermont schools.

Heaps says the greatest job growth occurred in professional and business services where more than 1600 positions were created largely by smaller new firms. Here’s his breakdown by sector:

  • Professional and Business Services: +1600
  • Manufacturing +1100 jobs
  • Health care +800
  • Construction +800
  • Information -400
  • Retail -400

Heaps’ conclusion:  The Vermont economy in 2013 will look just like it did in 2012 and when the national economy picks up growth in Vermont will remain slow.  Heaps says the Vermont economy will add another 2,500 jobs in 2013, a .8 percent growth rate, with the strongest sectors continuing to grow. Additionally construction and housing will pick up and add jobs, rather than being a drag on the economy.

In Heaps’ view, Vermont’s unemployment rate will fall by the end of the year to 5.0%, but the important factor is the labor force.  It’s in long term decline “and that’s something that makes us look different from the nation,” he observes.

“I’m even more pessimistic than I was before,” Heaps told the conference.   The state’s pool of younger workers is shrinking and the labor force is aging.

Even with low participation rates, people ages 65-84 are the growing part of Vermont’s labor force, Heaps says.

But overall the number of workers is declining, which will prevent payrolls from expanding and cramp state revenues, affecting state programs.

Heaps acknowledges other forecasts of job growth are more optimistic than his, but he says those projections are based on national projections and don’t factor in the lack of population growth in Vermont.  It’s a problem facing other states as well.

Former Tax Commissioner Tom Pelham, founder of the conservative advocacy group Campaign For Vermont gave a presentation on the state budget titled, “Is The Glass Tipping Toward Empty?”  It was an analysis of state budget and revenue trends and like the other speakers, Pelham sounded the alarm about demographic changes that he says are leading to unsustainable state spending.

Higher taxes, rainy day funds, or government reforms are the options Pelham mentioned, ticking off many of the spending-side themes of Campaign For Vermont: Bringing down education funding, streamlining affordable housing programs, and attacking energy costs.

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