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Economists: Business as usual in the Upstate … for now

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The start of the new year brings with it changes that may have an impact on our economy.

Even with the conclusion of the election cycle and the election of Republican Donald Trump as the nation’s president, there remains a degree of uncertainty as to what the leadership change will mean for the economy in the Upstate and South Carolina.

GSA Business Report reached out to economists across the state to seek out their thoughts on what they see the immediate future holding for our economy.

Locally, we talked to Tom Smythe, professor of business and economics at Furman University and Scott Baier, interim chairman of Clemson University’s John E. Walker Department of Economics.

Here is a look at the Upstate’s economic forecast:

Q. Now that the 2016 election cycle is over, what kind of changes do you see in terms of the national economy for 2017?

Smythe: At this point, it is hard to say with certainty. However, there are several factors that seem fairly certain under a Trump administration. First, there seems to be bipartisan support for spending on infrastructure – roads, bridges, ports and communications. Such spending is likely to have two effects immediately, the first being an increase in jobs in those sectors of the economy, which of course is positive. Second, this spending will likely lead to higher deficits and therefore add to the nation’s debt.  Any savings from reducing spending in other areas, even if they were to fully offset the infrastructure spending, would likely occur over time. The real unknown with this policy is whether it makes the U.S. more competitive. In theory, this investment should make our transportation networks safer and more efficient, thereby enticing businesses to grow. We would expect similar benefits with an improving communications infrastructure.

Noticeably absent from my response is the impact of President-elect Trump’s promise to lower individual and corporate tax rates. This is because I believe this may take longer than 2017. He and the legislature appear committed to changes, but this type of debate invariably takes longer than expected.  If he is successful, then there will be positive impacts on the economy, although it may take a couple of quarters for people to get the money and use it. However, if he is successful with tax cuts, when combined with his promises for infrastructure spending, deficits and the debt will rise significantly in the short to intermediate term.

So, we have offsetting short-term effects from these policy proposals. The real question is whether these policies will lead to stronger growth in the intermediate to long-term that will provide a return on investment. The term investment I use here is critical because both of these policy proposals are meant as investments, as opposed to pure spending, but all investments are risky and only time will tell if the return on the investment is justified.

Baier: Over the last 16 years, income growth has been lower than the long-term average for the U.S. economy. The election results made it a little more difficult to project. President-elect Trump’s tax plan has the potential to raise economic growth. However, the efficacy of tax reforms will also depend on changes in government spending. If lower taxes are not coupled with targeted reductions in government expenditures, economic growth may not be any higher than the last 16 years.

Q. The economy of the Upstate is unique and has been robust for some time now. What kind of impact do you see the presidential election having on the Upstate’s economy in 2017?

Smythe: In the short-term, which to me includes 2017, I think it will largely be business as usual. The real question for the Upstate is how a President Trump will impact international trade. Dr. Brent Nelsen and I wrote an op-ed for the Greenville News just prior to the election outlining how neither candidate’s stance on international trade was healthy for the country as whole but the Upstate in particular. Both candidates were against TPP and Mr. Trump has indicated he would repeal or renegotiate most trade pacts that we have and possibly impose stiff tariffs on imports. Such policies will harm the nation and the Upstate in particular in at least three ways. The first is inflation. By increasing the cost of imported goods, U.S. consumers will pay higher prices. Some may argue that this will create jobs in the U.S. to replace those products; however, there are two problems with this approach. First, we will not be able to ramp up production that quickly, if at all. Because we have been operating in a globalized world for more than 20 years, there are simply some things we do not make in the U.S. anymore. If we can get that production back, it will take time and cost more. Second, the U.S. imposing tariffs does not happen in a vacuum. In fact, most countries will respond in kind. That means that the products we do produce in the U.S. become more expensive abroad, which could stymy job growth here in the U.S.  In essence, U.S. companies go from having a multi-billion person market to the roughly 350 million person market in the U.S. Third, U.S. companies will no longer be exposed to direct competition, meaning they will not have incentives to innovate or lower costs at the same pace, neither of which is good for consumers. 

In fact, we are already seeing evidence of inflation in the markets. Prior to the election, the 10-year Treasury rate hovered at about 1.8%. As I write this, it is about 2.3% - a 27% increase in one week. This increase is not attributable to just Mr. Trump’s trade stance but also his stances on taxes and infrastructure spending. Please do not misunderstand my comments. A somewhat faster pace of inflation may actually be good, but there are direct consequences to consumers.

The more sizable impact to the Upstate would likely be beyond 2017. If President-elect Trump follows through with his trade policies, it will have a negative impact on job creation in the Upstate. The primary driver of job creation in the last 20 years has been from foreign firms like BMW and Michelin, as well as others. Yes, U.S.-based firms have cropped up to support these firms, but without the foreign direct investment by these firms, none of those jobs would exist. It has been a primary goal of every South Carolina governor since at least Carroll Campbell to attract business to the state, and we have been very successful at recruiting foreign firms. Gov. Haley has continued these efforts with great success. Protectionist policies would, over time, reduce new investment and could lead some firms to leave the Upstate, and you do not replace a BMW overnight.

Baier: I do not see the outcome of the election having a significant impact on the economy of the Upstate. The economic environment in the area will likely continue to attract businesses and workers. Employment growth in the Upstate has been robust across industries and occupations so that even in the event of a bad economic shock to an industry or a sector of the economy, the Upstate should be able to withstand the shock and continue to grow.

Q. Looking at the different sectors of business in the Upstate, what sectors do you see thriving in the next year and why? Conversely, what sectors do you see falling off and why?

Smythe: The answer to this question really depends on the speed with which certain policy proposals are implemented. The two big winners would seem to be healthcare, not necessarily insurance but delivery, and banking. Beyond that, I think it very much depends on what policies are implemented first. If infrastructure spending is first, then heavy construction would be a quick winner. If the administration tackles tax reform, individual and corporate, then the benefits would likely be more broad based. The one industry that may not be hurt, but may not benefit, is home construction. If taxes are cut, people will have more money; however, interest rates (mortgage rates) will likely continue to rise, which could offset tax cut benefits. As I have already mentioned, if trade policy changes quickly, then any firm whose business is dependent on imports or exports will be negatively impacted.

Baier: One of the hardest things to predict about the economy is which sectors are going to expand and which sectors are going to contract. Periods of high economic growth are typically the result of innovations and new developments in a few sectors of the economy that spread throughout the economy. These ripple effects result in faster economic growth. As such, it is hard to predict which sectors will grow exceptionally fast. Therefore, if economic growth picks up it is difficult to predict where employment will increase the most. If economic growth continues around 2%, employment growth will likely occur in the sectors driven by demographics and the underlying fundamentals that have been the driver over the last few years.

Q. It has been reported that the state’s economy has been in a state of growth while the national economy has tapered off slightly. Do you see that trend continuing into 2017? Why or why not?

Smythe: This is an area where Gov. Haley has excelled, attracting new business to the state. In the short-term, we are unlikely to see any change if firms have already started construction of facilities. However, prior commitments for capital investment where construction has not begun and new investment may slow as firms wait to see what the trade landscape will look like. Firms with projects underway are unlikely to abandon them, but new projects may be delayed. So, I would see a slowing growth but with a lag. In essence, firms want to see how the current uncertainty regarding a President Trump’s trade policies will be resolved before they commit to new investment.

Baier: For the most part the state’s economic performance is very similar to the national economic performance. I would expect that trend to continue. I do think that that there are reasons to believe that the Upstate and the region will fare better than the national average, but I do not expect these differences in employment and economic growth to be dramatically different.

Q. What is the biggest concern you have for the national economy in 2017? Why is that a concern and is there a way to overcome that concern?

Smythe: I think there are several, all of which are related. First is the trade situation. Restricting or putting up barriers to trade is not good. It will hurt the U.S. and especially the Upstate. My second concern is a growing debt burden from tax cuts and increased spending. Republicans in Congress should have a tough time selling these to the public after being so vocal in recent years regarding the national debt. However, I can guess what the rhetoric will be. They will sell the fact that people will have more in their pockets, which is absolutely true, and that growth will lead to more taxes in the long term. The problem is, we have to deal with the debt now and there is no guarantee the growth will be enough to offset the debt that we have to take on now. Historically, on average, that has not happened, in part because as growth accelerates, politicians on both sides of the aisle start to spend more. A compounding factor is that we will be adding this debt as interest rates are rising, meaning the incremental cost of each additional borrowed dollar plus every dollar we have borrowed to this point is higher. Unfortunately, cutting taxes has populist support at the individual level. However, I would ask people to look at this issue at the community and national level. Third, I see inflation rising with increased spending and tax cuts, especially if undertaken simultaneously. This will be more severe if protectionist trade policies are also enacted. We can live with some faster inflation; however, once inflation starts, it can be hard to manage and usually comes with serious consequences.

Baier: The biggest concern is uncertainty. President-elect Trump liked to view himself as a political outsider that when elected would change the way things were run in Washington, D.C. What the change will be, no one is quite sure. As such, there I think people think that there are more upside risks as well as more downside risks associated with his economic plan. In order to mitigate these risks, President-elect Trump should try to provide as much clarity as possible about his economic vision. The sooner he provides details on taxing, spending and regulation it will allow markets to adjust and ease the transition.

Reach Matthew Clark at 864-235-5677, ext. 107.

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