Thursday, September 21, 2017

Don't Rock the Economic Boat

Bad but nor surprising news: former U.S. Representative Cynthia Lummis
has ruled out running next year for governor of Wyoming. Lummis says that she had seriously thought to running [sic] for governor but ultimately decided that she wanted more personal time and freedom from politics. 
The political grapevine had it already in early August that she was "probably" not going to run. Too bad. She is an unrepentant fiscal conservative and has a lot of backbone. We need someone of her caliber to lead our state out of the fiscal and macroeconomic mess we are in today. 

Hopefully, someone with comparable credentials will step forward. We need a governor who will lead from ahead, not follow from behind. With all due respect to the gubernatorial incumbent - the fortitude he showed early on in his first term is long gone. I still like the guy, but he is too much of a Tom Hagen; we need a "wartime consigliere".

Our state's economy, and the fiscal future of our state and local governments, must be the top issues in next year's gubernatorial race. We are at a fork in the road, with a legislative leadership pulling in the statist direction with hundreds of millions of dollars in new taxes, and a small but growing crowd of brave fiscal conservatives - inside and outside the legislature - pulling in the opposite direction. With a probable stand-off during the 2018 legislative session, the next governor will be the tie breaker.

If that person is a welfare statist, our state is done for. If that person is a fiscal conservative with a backbone, then we have a fighting chance to restore prosperity and a future here in wonderful Wyoming. 

To emphasize how delicate the situation is, on Tuesday I reported new jobs data for the month of August, showing that our state's economy, while having exited a painful downturn, is in a weak state of stability. Imagine that you are standing up in a rowing boat in calm waters. The slightest wave or misstep on your end, and you will be swimming. 

That wave would be the $200, $300, even $400 million in higher taxes that our legislators will be considering during the coming session. To that, we may have to add the bizarre ideas for new state spending being put forward by Governor Mead's ENDOW group (see my three-part analysis, one, two and three, of that report). Including those, the "need" for higher taxes could reach half a billion dollars per year.

Bluntly, our state would not survive that kind of tax hike. Not a chance. To further underscore the frailty of our current stability, we will take a careful look at new state personal-income data that the Bureau of Economic Analysis will release next week. In the meantime, here are some numbers on earnings and hours in some key industries here in Wyoming. These numbers, published by the Bureau of Labor Statistics, are reasonably well matched with the jobs data we discussed on Tuesday; the industrial breakdown is not as detailed, but they give a good overview of where our state is heading. 

The one industry I expressed concern about in Tuesday's article is Professional and Business Services. As I explained, this industry is 
still in decline, a clear indication of overall weakness in our state's private sector; this industry includes scientific and technical services, architects, engineering consultants, business management consultants, and other administrative and support functions; having lost almost 2,000 jobs in two years (now at 17,700) this industry tells us that our businesses, while slimming down to stay afloat, are in absolutely no shape to take on any new costs of any kind.
Earnings data confirm this conclusion: compared to August last year, average weekly earnings in this industry are down marginally, by 0.8 percent. Average weekly hours worked are also down, 1.1 percent. No big numbers, and it is worth noting that these numbers come on top of a short trend of some growth in both earnings and hours. Nevertheless, given the importance of this industry as an indicator of overall prosperity in the business sector, its weakness is a red flag as good as any that rocking the boat is a bad idea. 

Mining is, of course, a key industry here in Wyoming. The employment situation in this industry is stable, but not upward trending. The exception is support activities for oil and gas, where most of the new jobs in the minerals industry have been going. We cannot see trends in earnings and hours with the same detail as "head count" employment, but generally, minerals employees earned 2.6 percent less per week in August this year compared to the same month in 2016. This after five months of earnings exceeding last year's, so there is no reason to believe that this is a new trend.

That said, average weekly hours worked in the minerals industry also declined, by three percent. Earnings and hours often decline together, but there are also instances where earnings change but not hours (and vice versa). Those instances tell us a different story than when the two variables are moving in the same direction: with hours declining a bit more than earnings, and employment simultaneously going up, it is reasonable to conclude that the minerals industry is not ready to give up on the slight uptick in business they have seen in the past few months. 

However, all the tax proposals floating around the state inject a fair amount of uncertainty into their operations. They add to the broader, macroeconomic uncertainty that runs from the political inertia in Congress to the worrying signs of a structural weakening of the Chinese economy.

As for transportation, I reported on Tuesday that truck transportation has downsized considerably in the past three years. On the upside, the entire industry - including trade, transportation and utilities - has maintained its average weekly hours over the past year (34.7 in August last year, 34.9 in August this year) while increased pay by 3.2 percent. These numbers are not perfectly comparable to the truck transportation number, but at least they show some stability in the industry as a whole. 

Construction jobs have stayed flat over the past year, but earnings are down 2.5 percent and hours declined one percent. Here, we have the opposite relationship between declining hours and earnings, which could indicate a broader downturn with some substance. That said, the employment numbers we discussed on Tuesday suggested a clear downturn in heavy and civil engineering construction. With that in mind, it is easier to explain why the earnings decline is 2.5 times larger than the decline in hours: the work being lost in this industry is of a  higher-paying kind. 

Add that to the weakness of the professional and business services industry, and the standstill that characterizes financial services, and we have reasons to conclude:

a) our state's economy provides insufficient opportunities for people with advanced professional degrees, such as engineering, architecture, finance and management;
b) the business community in our state is not confident enough in the future to invest in costlier projects; and
c) contrary to what the ENDOW report says, our problem is not sufficient supply of productive resources - our problem is that the cost of doing business here in Wyoming is either too high or too uncertain, or both. 

The last point is easily drawn from the numbers we just discussed: if the prices are falling on services provided by highly educated professionals, then the problem is not shortage on the supply side. It is shortage of demand for those services. 

Instead of discussing hundreds of millions of dollars in higher taxes, our legislators and our governor should focus on reducing the cost of doing business, and making the cost of doing business more predictable. Add to that structural reforms to key spending programs that guarantee a lower cost of government over the long term, and we will see a substantial surge in employment, earnings, business investments and prosperity in our state. 

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