BIG STORY: Economists warn of ‘softening’ state growth

By Lindsay Street, Statehouse correspondent  | South Carolina’s economy is expected to follow a national trend of softening growth into 2021, according to multiple economists advising the state’s three-member board that forecasts revenues for the state budget.

“It’s important for the BEA (Board of Economic Advisors) to take into account that the last year has been very strong in terms of our overall economic activity, and we need to be cautious because we are anticipating a bit of softening of growth,” University of South Carolina economist Joey Von Nessen told Statehouse Report. 

The BEAs, which is part of the S.C. Revenue and Fiscal Affairs Office, will offer a November forecast that House lawmakers will use to begin writing the 2020-2021 state budget for the fiscal year that begins July 1, 2020. Every year, the BEA hears from economists around the state prior to making the forecast. On Thursday, Frank Hefner of College of Charleston, Raymond Sauer of Clemson University, Russell Sobel of The Citadel and Mark Vitner of Wells Fargo Securities joined Von Nessen in speaking to the board.

“We do our best to provide good information for them to make a decision for the budget in the coming year,” Von Nessen said. 

BEA Chairman Edward B. Grimball of Edisto Island said the regional advisors “play an important role in our revenue forecasting.” The information from the outside economists will be taken into account alongside staff analysis and board members’ “own knowledge” in determining revenue forecasts, he said in a statement. 

It’s a tricky business forecasting revenues for a year or two ahead. In boom times, an off-forecast could mean a surplus. South Carolina’s revenue forecast has been off by 2 percent and 4 percent over the last two years, which accounted  for a $177 million surplus in the 2017-2018 budget and a $350 million surplus the following year. But in a recession, an inaccurate forecast could lead to mid-year budget cuts and other belt-tightening measures.

Clouds on the horizon

This year’s message from the economists: If the economy is like the weather, then it’s still sunny but now’s the time to pack the raincoat and make sure the car windows are rolled up. 

South Carolina’s economy still appears to be humming along, Von Nessen, Sauer and Sobel told Statehouse Report. August’s job report for South Carolina showed a jobless rate of 3.2 percent, a tad lower than the national rate of 3.7 percent.The September job report will be due today after publication. 

“We riding a pretty strong period of economic performance at least in terms of sustained economic growth, substantial gains in employment, the largest reduction in the unemployment rate since the Great Depression and solid average wage growth,” Sauer said. “All of that is a sign of a healthier economy than we might have expected if we were drawing up a forecast for the decade at the start of 2010.”

But clouds are on the horizon as exports drag, manufacturing slows, and uncertainty looms because of global trade policies. All of these factors have big implications in South Carolina. 

“The most likely outcome is that we continue to grow,” Sobel said. He added that his main point on the S.C. economy is a “slight increase in risk and a slight decrease in growth.” 

Uncertainty from national and global sources was a keyword among the economists. It affects investment and business decision. 

“There’s a lot of uncertainty this year. Uncertainty is really the new normal, and countering economic forces are suggesting we will see slower growth in the new year,” Von Nessen said. “The probability of a recession is higher than it was this time last year.”

While a recession is possible, Von Nessen said there are factors that could be resolved — such as the ongoing trade disputes — and help the economy avoid a downturn. 

Sobel said, “there’s no data that would suggest that” the economy is slipping into a recession, but “there’s a lot more uncertainty.”

Sauer said most economists around the nation are expecting a recession to begin in either late 2020 or into 2021. 

Advice:  ‘Don’t overextend’

The economists were not tasked with advising the BEA on how state lawmakers should draft the state budget in response to their forecast. But Statehouse Report asked Sauer, Sobel and Von Nessen how the state should respond to information of softening growth. 

“‘Don’t overextend’ is the right way to look at it,” Sauer said, but he added the state has a huge liability hanging over its head: state employee pensions. He said the state needed to use times of growth to fund pensions fully, since it would be unlikely to fund them in a down economy. “They’re underfunded and this is a manifestation of the government not being able to establish priorities and keep commitments, and that’s where we have the most ground to makeup.”

Sobel said the state should avoid “undertaking any new major things … that aren’t totally necessary” in the 2020-2021 budget. He said it’s typical of state and local governments to spend too much during “good times” and not save enough for future recessions. 

In South Carolina, where the budget took big hits in the recession, state spending on some programs still has not returned to pre-recession levels. One example of this is higher education spending. 

“In boom times, we spend more on existing programs, and start a bunch of new ones. So what this creates is a situation where most states, including South Carolina, have to make big cuts during recessions when revenues fall,” Sobel said.

That said, Sauer said the state and the financial markets could be in a better position than prior to the Great Recession to weather any downturn. And Von Nessen felt that South Carolina’s weakness in its economy now — labor shortages — could prove to be strengths in a softening of growth. 

“A slight softening from a labor perspective is something South Carolina can handle,” he said. 

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